Canadian Dollar declines as oil prices ease, US Dollar gains

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USD/CAD gains ground after four days of losses, trading around 1.3820 during the Asian hours on Friday. The pair appreciates as the commodity-linked Canadian Dollar (CAD) struggles amid lower oil prices, given Canada’s status as the largest crude exporter to the United States (US).

USD/CAD rises as the commodity-linked Canadian Dollar weakens amid falling oil prices.
WTI drops over 11.5% this week after the US–Iran agreed to a two-week ceasefire, easing supply concerns.
US official confirms Lebanon–Israel talks will be held next week in Washington, DC.

West Texas Intermediate (WTI) oil price holds losses after experiencing volatility, trading around $91.80 per barrel at the time of writing. The WTI price is down by over 11.5% for the week, at the time of writing, after the US and Iran agreed to a two-week ceasefire.

However, crude oil prices may regain ground as Israeli strikes on Lebanon and the ongoing closure of the Strait of Hormuz strain diplomatic efforts. Israeli Prime Minister Benjamin Netanyahu said that there is “no ceasefire in Lebanon” and Israel would continue “to strike Hezbollah with full force” as the country’s military launched fresh strikes.

Reuters reported that a US State Department official confirmed that talks between Lebanon and Israel will take place next week in Washington, DC. “We can confirm that the Department will host a meeting next week to discuss ongoing ceasefire negotiations with Israel and Lebanon,” said a US official.

US Federal Reserve’s (Fed) March Meeting Minutes suggest the central bank remains in a wait-and-see stance, while acknowledging that inflationary risks linked to higher oil prices are becoming more balanced. Traders await the US Consumer Price Inflation (CPI) report due later in the North American session.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.