Canadian Dollar remains depressed vs firmer USD; rising Oil prices limit further losses

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USD/CAD trades with positive bias for the fourth straight day amid a broadly firmer USD.
Iran tensions and hawkish Fed expectations turn out to be key factors supporting the USD.
Rising Crude Oil prices could underpin the Loonie and cap further upside for spot prices.

The USD/CAD pair attracts some dip-buying following Friday's late pullback from the vicinity of the 100-day Simple Moving Average (SMA) and climbs back closer to the 1.3700 during the Asian session on Monday. This marks the fourth straight day of a positive move – also the sixth in the previous seven – and is sponsored by a modest US Dollar (USD) strength.

The recent optimism over a potential US-Iran peace deal and the de-escalation of conflict faded rather quickly in the wake of renewed hostilities in the Strait of Hormuz. Adding to this, US President Donald Trump and Iran both rejected each other’s peace proposals for ending the war and the gradual reopening of the Strait of Hormuz amid major disagreements over Iran's nuclear program. This keeps geopolitical risks in play and benefits the safe-haven USD, offering some support to the USD/CAD pair.

Meanwhile, persistent geopolitical uncertainties trigger a fresh leg up in Crude Oil prices, reviving inflationary fears. Adding to this, the upbeat US Nonfarm Payrolls (NFP) report, released on Friday, fuelled expectations for a more hawkish US Federal Reserve (Fed) and turned out to be another factor underpinning the Greenback. The Canadian Dollar (CAD), on the other hand, is weighed down by the disappointing monthly employment details, which showed that the Unemployment Rate rose to 6.9% in April.

That said, rising Crude Oil prices might hold back traders from placing aggressive bearish bets around the commodity-linked Loonie and cap any further upside for the USD/CAD pair. Even from a technical perspective, Friday's failure ahead of the 100-day SMA makes it prudent to wait for a sustained strength above the said barrier before positioning for any further gains. In the absence of any relevant market-moving economic data, spot prices remain at the mercy of USD/Oil price dynamics.

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.