Canadian Dollar remains weaker as oil slips

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USD/CAD remains stronger for the seventh consecutive day, trading around 1.3930 during the Asian hours on Tuesday. The pair holds ground as the commodity-linked Canadian Dollar (CAD) struggles amid lower oil prices, given Canada’s status of the largest crude exporter to the United States (US).

USD/CAD holds firm as the commodity-linked Canadian Dollar weakens on lower oil prices.
Oil falls after reports that Trump may end Iran campaign despite Strait of Hormuz closure.
Fed’s Powell says long-term US inflation expectations remain anchored despite heightened Middle East uncertainty.

West Texas Intermediate (WTI) oil price declines after four days of gains, trading around $98.60 per barrel at the time of writing. Crude oil prices fall after US President Donald Trump reportedly signaled willingness to end the Iran campaign even if the Strait of Hormuz remains largely closed. However, this also eases safe-haven demand, weighs on the US Dollar (USD), and limits the upside of the USD/CAD pair.

However, ongoing US troop deployments suggest mixed signals and sustained risks to global energy flows. Meanwhile, Iran struck a Kuwaiti oil tanker near a Dubai port, highlighting rising shipping risks in the Persian Gulf. Iran-backed Houthis also entered the conflict by targeting Israel over the weekend, while Tehran is reportedly preparing to disrupt Red Sea traffic.

Federal Reserve (Fed) Chair Jerome Powell said at a Harvard economics class on Monday that long-term US inflation expectations remain well anchored despite heightened Middle East uncertainty, adding that the Fed’s current policy stance gives officials time to assess the economic impact of the Iran conflict.

New York Fed President John Williams said on Monday that monetary policy is well-positioned for any unusual circumstances and told Reuters that the job market is still sending mixed signals.

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.