Canadian Dollar gains as Oil prices surge on Middle East supply risks

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The Canadian Dollar (CAD) outperforms most of its major peers on Monday as renewed tensions in the Middle East push Oil prices higher amid fresh risks of supply disruption in the Strait of Hormuz.

The Canadian Dollar gains as Middle East supply risks lift crude Oil prices.
The US Dollar remains volatile as traders monitor developments in the Middle East.
Traders await US CPI data and the Bank of Canada’s policy decision this week.

The Canadian Dollar (CAD) outperforms most of its major peers on Monday as renewed tensions in the Middle East push Oil prices higher amid fresh risks of supply disruption in the Strait of Hormuz.

At the time of writing, USD/CAD trades around 1.4144, remaining on the back foot for a fifth consecutive day. WTI trades around $74.50, up over 4% on the day. Higher crude Oil prices support the commodity-linked Loonie, given Canada’s status as a major Oil exporter.

The United States (US) and Iran exchanged missile and drone attacks over the weekend, while Tehran claimed that it had once again closed the Strait of Hormuz.

However, US President Donald Trump said in a Truth Social post that the strait “is OPEN, and will remain OPEN, with or without Iran.” Trump added that the US would act as the “guardian” of the Strait and be reimbursed at a rate of 20% on all cargo shipped through the waterway.

The US Dollar (USD) remains volatile as traders assess the evolving situation in the Middle East. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.14 after briefly slipping below 101.00 earlier in the day.

Higher Oil prices are also reviving inflation concerns, adding pressure on central banks to tighten monetary policy. The Bank of Canada (BoC) will announce its policy decision on Wednesday and is widely expected to leave its interest rate unchanged at 2.25%.

BNY’s Geoff Yu noted, “Markets are expecting no change at least until Q4, but easing could be on the agenda with any renewed downside surprises to inflation.” Yu added, “The recent pick-up in core inflation and labor market improvements suggest the status quo is adequate, but as Governor Tiff Macklem noted, the BoC is prepared to ‘take action’ if the situation changes on inflation expectations.”

The US Consumer Price Index (CPI) data on Tuesday will be closely watched for fresh clues about the Federal Reserve’s (Fed) next move, alongside Fed Chair Kevin Warsh’s congressional testimony.

The Fed is widely expected to leave interest rates unchanged this month, while the CME FedWatch Tool shows a 71% probability of a rate hike in September.

Bank of Canada FAQs

What is the Bank of Canada and how does it influence the Canadian Dollar?

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.