Canadian Dollar gains traction to near 1.3600 as Oil gains on Strait of Hormuz closure

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The USD/CAD pair trades in negative territory around 1.3600 during the early European trading hours on Thursday. A rise in crude oil prices provides some support to the commodity-linked Canadian Dollar (CAD). The US weekly Initial Jobless Claims report will be released later on Thursday.

USD/CAD softens to near 1.3600 in Thursday’s early European session.
Oil prices rise on Strait of Hormuz closure, supporting the commodity-linked Loonie.
Traders await the US PCE inflation data for January, which will be released on Friday.

The oil market faces volatility after Iran said that the world should be ready for crude at $200 a barrel as its military attacked merchant ships on Wednesday, and vessel traffic through the Strait of Hormuz dwindled to a trickle. Bahrain said early Thursday that Iran has targeted fuel tanks at one of its facilities, while a senior Iraqi port official said two foreign tankers had been hit in its waters, catching fire and leaking oil.

"We should expect ongoing volatility in energy prices," said Rodrigo Catril, a currency strategist at National Australia Bank in Sydney. "The longer that there's no ability to go through, the pressure on prices will continue.”

Persistent geopolitical risks could boost crude oil prices and underpin the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.

Traders will closely monitor the US Personal Consumption Expenditures (PCE) Price Index report for January, which is due on Friday. The headline PCE is expected to see an increase of 2.9% YoY in February, while core PCE is projected to see a rise of 3.1% during the same period. If the reports show hotter-than-expected outcomes, this could lift the Greenback against the CAD in the near term.

Markets are now pricing in nearly a 99.5% probability that the Federal Reserve (Fed) will hold the interest rates steady at its March policy meeting, according to the CME FedWatch tool.

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.