USD/CAD steadies above 1.3920 despite a softer US Dollar

Trump ponders ending the war in Iran

A report by the Wall Street Journal released on Tuesday suggests that Trump told his close aides that he is willing to end the military campaign in Iran even if the Strait of Hormuz remains largely closed. The US President considers that an operation to reopen it would extend the war beyond the timeline of five or six weeks, and therefore would rather leave it for a later date

The news triggered a tame risk appetite, pulling the safe-haven US Dollar lower against its main peers. Markets, however, remain largely risk-averse. Asian Markets are posting moderate losses, although European and Wall Street futures are pointing to a positive opening.

In the meantime, Trump has reiterated his threat to obliterate Iran’s energy plants if Tehran fails to open the Strait of Hormuz, while the Islamic Republic called US peace proposals unrealistic, fired a fresh barrage of missiles at Israel, and, according to reports by Kuwaiti authorities, attacked an Oil tanker anchored at Doha harbour.

On Monday, Federal Reserve (Fed) Chairman Jerome Powell cooled market hopes of an immediate interest rate hike and said that inflation pressures remain anchored for now, which sent Treasury yields tumbling and added negative pressure on the US Dollar.

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.