USD/CAD holds below 1.3750 amid hope for Israel-Iran ceasefire
- USD/CAD edges lower to around 1.3730 in Tuesday’s early Asian session.
- Fed’s Bowman said the time to cut interest rates is getting nearer.
- Hopes of de-escalating the Middle East conflict after Iran’s strike against a US base undermine the US Dollar.
The USD/CAD pair trades with mild losses near 1.3730 during the early Asian session on Monday. The dovish remarks from the Federal Reserve (Fed) officials and easing tension in the Middle East weigh on the US Dollar (USD). Investors brace for Chair Jerome Powell’s semiannual testimonies and the release of US Consumer Confidence later on Tuesday.
Fed’s Vice Chair for Supervision Michelle Bowman said on Monday that the time to cut interest rates is getting nearer as risks to the job market may be on the rise. Bowman added that inflation appears to be on a sustained path back to 2% and she is less concerned that tariffs will cause an inflation problem. Her dovish comments have dragged the Greenback lower against the Canadian Dollar (CAD).
Iran fired missiles at the Al Udeid Air Base in Qatar on Monday. Qatar officials said that the missile barrage was intercepted and that the base had been evacuated in advance. Reuters reported early Tuesday that US President Donald Trump said that a "complete and total" ceasefire between Israel and Iran will go into effect in order to end the conflict between the two nations.
A senior Iranian official confirmed to Reuters that Tehran agreed to a Qatari-mediated, US-proposed ceasefire with Israel. Hopes of de-escalating the Middle East conflict undermine the safe-haven currency like the US Dollar.
Meanwhile, a fall in Crude Oil prices might weigh on the commodity-linked Loonie and cap the downside for the pair. It’s worth noting that Canada is the largest oil exporter to the US, and lower crude oil prices tend to have a negative impact on the CAD value.
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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