Canadian Dollar gains as US Dollar weakens on easing risk aversion

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USD/CAD halts its four-day winning streak, trading around 1.3850 during the Asian hours on Friday. The pair weakens as the US Dollar (USD) softens on decreasing risk aversion after recent remarks from US President Donald Trump.

USD/CAD depreciates as market sentiment improves on the US pausing attacks on Iran’s energy sector.
The US Dollar may rebound as inflation fears curb Fed cut bets, boosting hike expectations.
The commodity-linked CAD may face challenges amid softer oil prices.

Trump said Washington would pause attacks on Iran’s energy sector for 10 days at Tehran’s request, extending the April 6 deadline to allow more time for negotiations. However, the Wall Street Journal reported that mediators said Iran denied making such a request, underscoring fragile diplomacy and low odds of a near-term ceasefire.

The Greenback may regain its ground on rising inflation concerns, prompting traders to scale back expectations of further Federal Reserve (Fed) rate cuts and increase bets on a potential hike by year-end.

Federal Reserve (Fed) Vice Chair of Supervision Philip Jefferson said higher energy prices should have a modest impact on inflation, though a sustained shock could be more significant. Meanwhile, Fed Governor Michael Barr warned that another price shock could lift inflation expectations, reinforcing the case for the Fed to assess economic conditions before adjusting policy.

The downside in USD/CAD may be limited as the commodity-linked Canadian Dollar (CAD) could struggle amid softer oil prices. Traders remain cautious as the Pentagon considers deploying up to 10,000 additional ground troops to the Middle East to maintain strategic flexibility and deterrence if talks fail.

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.