Canadian Dollar strengthens on US–Iran ceasefire hopes

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The USD/CAD pair declines to around 1.3940 during the early European trading hours on Monday.

USD/CAD weakens to near 1.3940 in Monday’s early European session.
The US and Iran are reportedly seeking a ceasefire.
US NFP rose by 178,000 in March, more than expected.

The USD/CAD pair declines to around 1.3940 during the early European trading hours on Monday. The US Dollar (USD) edges lower against the Canadian Dollar (CAD) after reports that the US, Iran and regional mediators are discussing terms for a possible 45-day ceasefire that could lead to an end of fighting.

Bloomberg reported on Monday that the US and Iran are exploring a 45-day ceasefire. Earlier, US President Donald Trump set a new deadline for Iran to reopen the strait, threatening strikes on infrastructure if met with non-compliance.

Trump extended his deadline by 20 hours, posting a new deadline of Tuesday at 8:00 pm EST (00:00 GMT on Wednesday). Easing tensions between the US and Iran could undermine a safe-haven currency such as the Greenback in the near term.

Rising bets for an interest rate hike by the US Federal Reserve (Fed) could provide some support to the USD. The US Nonfarm Payrolls (NFP) report came in stronger than expected, with the US economy adding 178,000 jobs in March. This figure followed a 133,000 decline (revised from -92,000) in February, above the market consensus of a 60,000 gain. The Unemployment Rate edged lower to 4.3%, though that was largely from a sharp reduction in the labor force.

Meanwhile, crude oil prices retreat as traders await further developments surrounding US-Iran peace talks. It is worth noting that Canada is a major oil-exporting country, and lower crude oil prices generally have a negative impact on the CAD.

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.