USD/CAD drifts higher above 1.3550 on firmer US Dollar
- USD/CAD edges higher to near 1.3580 in Tuesday’s early Asian session.
- Persistent Middle East geopolitical tensions continue to support the US Dollar.
- Traders await the US May Retail Sales data later on Tuesday for fresh impetus.
The USD/CAD pair recovers some lost ground to around 1.3580 during the early Asian session on Tuesday. The US Dollar strengthens against the Canadian Dollar (CAD) as investors monitor the conflict between Israel and Iran for signs it could escalate into a broader regional conflict.
Investors have been closely watching the developments surrounding geopolitical risks after Israel’s strike on Iran on Friday. The ongoing geopolitical tensions are likely to underpin the Greenback in the near term. Nonetheless, there was some optimism on Monday that the situation wouldn’t escalate after Iran reportedly asked several countries, including Saudi Arabia, to urge US President Donald Trump to put pressure on Israel for an immediate ceasefire.
Canadian Prime Minister Mark Carney said on Monday that he had agreed with Trump that their two nations should try to wrap up a deal on tariffs within 30 days.
On the other hand, extended gains in Crude Oil prices might boost the commodity-linked Loonie. It’s worth noting that Canada is the largest oil exporter to the US, and higher crude oil prices tend to have a positive impact on the CAD value.
The US May Retail Sales data will be in the spotlight later on Tuesday. On Wednesday, the attention will shift to the Federal Reserve (Fed) interest rate decision. Based on the latest US inflation data, traders now see a nearly 80% possibility of a Fed rate cut in September, followed by another one in October, according to Reuters.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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