Canadian Dollar gains as market sentiment improves after US-Iran ceasefire

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USD/CAD continues to lose ground for the third successive day, trading around 1.3830 during the Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) declines on decreased safe-haven demand after the United States (US) and Iran agreed on a two-week ceasefire.

USD/CAD slips as the US Dollar weakens on improved market sentiment after a US-Iran two-week ceasefire.
The commodity-linked CAD may weaken as oil prices fall on easing supply concerns.
Trump said the US received a 10-point proposal from Iran, calling it a workable basis for negotiations within two weeks.

However, the downside of the USD/CAD pair could be restrained as the commodity-linked Canadian Dollar (CAD) may face challenges amid lower prices following the US-Iran ceasefire, given the fact that Canada is the largest crude exporter to the United States.

West Texas Intermediate (WTI) oil price trades around $89.80 per barrel, down by over 11%, at the time of writing. Crude oil prices weaken on easing supply fears after US President Donald Trump agreed to a two-week ceasefire with Iran on the condition that Iran agree to reopen the critical Strait of Hormuz.

Trump also said the US received a 10-point proposal from Iran, calling it a “workable basis for negotiations,” with a two-week window to finalize a deal. Iran also agreed to reopen the key waterway for two weeks if all attacks cease, while Israel has reportedly accepted the truce.

On the data front, Canada’s seasonally adjusted Ivey Purchasing Managers’ Index (PMI) fell to 49.7 in March from 56.6 prior, missing the 55.9 forecast and signaling contraction. Meanwhile, the US ADP Employment Change four-week average rose by 26,000 jobs from 15,250 previously, marking a third straight week of hiring gains.

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.