Canadian Dollar remains subdued due to stronger US Dollar, softer oil prices

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USD/CAD continues its winning streak for the sixth successive day, trading around 1.3920 during the European hours on Monday. The pair gains ground as the US Dollar (USD) regains its ground amid increased safe-haven demand on rising doubts over a resolution to the Iran war.

USD/CAD rises as the safe-haven US Dollar gains on the US-Iran war.
Trump said the US could seize Iran’s oil, including its key export hub on Kharg Island.
The commodity-linked Canadian Dollar weakens amid steady oil prices.

The Financial Times reported that President Donald Trump said that the US could “take the oil in Iran,” including seizing the export hub of Kharg Island, which he claimed is undefended. However, Trump added that discussions with Tehran are “doing extremely well,” with indirect talks via emissaries progressing and a deal potentially achievable “fairly quickly.”

Iran-backed Houthi forces in Yemen launched their first strikes on Israel over the weekend, widening the regional conflict and warning that attacks will continue until operations against Iran and its allies cease. The group also threatens Red Sea shipping routes and key Saudi energy infrastructure, heightening risks to global supply.

Traders will likely track a speech from Fed chair Jerome Powell late Monday evening. Traders will also likely observe this week’s key economic releases, including labor market indicators, particularly Nonfarm Payrolls (NFP), and the ISM Purchasing Managers’ Index (PMI).

The USD/CAD pair also remains stronger as the commodity-linked Canadian Dollar (CAD) struggles amid steady oil prices, given Canada’s status of the largest crude exporter to the United States (US).

West Texas Intermediate (WTI) oil price edges lower after three days of gains, trading around $98.70 per barrel at the time of writing. However, crude oil prices may regain their ground on supply concerns amid the ongoing Middle East conflict.

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.