Canadian Dollar struggles near mid-1.3800s vs USD, lowest since April 13 amid Iran risks

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The USD/CAD pair attracts buyers for the third consecutive day and trades near mid-1.3800s, or its highest level since April 13, during the Asian session on Thursday.

USD/CAD gains positive traction for the third successive day amid a broadly firmer USD.
A fresh escalation in the Iran conflict and hawkish Fed bets benefit the safe-haven buck.
Rebounding Oil prices could underpin the Loonie and cap the pair ahead of the US data.

The USD/CAD pair attracts buyers for the third consecutive day and trades near mid-1.3800s, or its highest level since April 13, during the Asian session on Thursday. Spot prices look to build on the previous day's breakout momentum through a technically significant 200-day Simple Moving Average (SMA) amid a broadly firmer US Dollar (USD), bolstered by persistent geopolitical uncertainties. However, recovering Crude Oil prices could underpin the commodity-linked Loonie and cap the upside as traders now look to important US macro releases for some meaningful impetus.

The latest developments surrounding the Middle East crisis dampen hopes for a US-Iran deal to end a three-month-old war and lift the USD Index (DXY), which tracks the Greenback against a basket of currencies, to a fresh weekly high. A US official told Reuters that US military carried out fresh strikes in Iran on Wednesday, targeting a military site that posed a threat to American forces and commercial maritime traffic in the Strait of Hormuz. The US official also said American forces intercepted and shot down multiple Iranian drones that posed a similar threat.

Earlier, US President Donald Trump said that he is not satisfied with the terms of the deal negotiated with Iran and that he won’t be rushed into a deal. This comes on top of major US-Iran disagreements over Tehran's nuclear program and a standoff over the Strait of Hormuz, raising the risk of a further escalation of tensions in the region. Furthermore, reviving inflationary concerns bolster bets for an interest rate hike by the US Federal Reserve (Fed) later this year, which turns out to be another factor that provides a goodish lift to the USD and supports the USD/CAD pair.

Meanwhile, renewed hostilities assist Crude Oil prices to stage a modest recovery from a nearly three-week low, touched on Wednesday. This might hold back traders from placing aggressive bearish bets around the Canadian Dollar (CAD) and act as a headwind for the USD/CAD pair. Traders might also opt to wait for the release of the US Personal Consumption Expenditures (PCE) Price Index and the Preliminary US GDP report before positioning for the next leg of a directional move. Nevertheless, the fundamental backdrop backs the case for a further appreciating move.

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.