USD/CAD hesitates at 1.3900 on hopes of a swift end to the war

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The US Dollar (USD) is trading moderately lower on Wednesday, with the Canadian Dollar a tad firmer amid a cautious appetite for risk, following comments by US President Donald Trump, suggesting a quick end to the Iran war.

USD/CAD hovers around 1.3900 amid a moderate optimism about the end of Iran's war.
Trump affirmed that he is willing to end the war in two to three weeks.
Oil prices have dropped about 5% over the last two days, adding some weight to the Loonie's recovery.

Trump boosted investors' sentiment on Tuesday, stating that the US will leave Iran in two or three weeks, even without a deal with Tehran, and that the Strait of Hormuz will open automatically after the US exit. The US President has announced an "important message· on Iran at 13:00 GMT on Wednesday.

The market reaction, however, has been cautious so far. The US has hit targets near the city of Isfahan, and Israel has reported missiles launched from Yemen. Furthermore, the Wall Street Journal affirmed that the United Arab Emirates is willing to enter a coalition to force Tehran to reopen the Strait of Hormuz, while the US Defence Secretary, Pete Hagseth, said that the US will keep bombing Iran until a deal is reached.

Oil prices, Canada’s main export, are pulling back for the second consecutive day. The US benchmark West Texas Intermediate has dropped nearly 5% over the last two days, retreating to levels below $100.00, which is posing some headwind for a significant Canadian Dollar recovery.

On the macroeconomic front, Canadian S&P Global Manufacturing Purchasing Managers' Index (PMI) data might attract some attention later on the day. In the US, the ADP Employment Change, February’s Retail Sales, and the ISM Manufacturing PMI will set the tone for the key US Nonfarm Payrolls report, due next Friday.

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.