Canadian Dollar weakens despite higher oil prices

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USD/CAD gains ground for the third successive day, trading around 1.4210 during the European hours on Tuesday. The pair appreciates as the US Dollar (USD) holds ground, which could be attributed to the renewed geopolitical tensions in the Strait of Hormuz.

USD/CAD rises as the US Dollar holds gains amid renewed geopolitical tensions in the Strait of Hormuz.
The Greenback’s upside could be restrained as traders price out any Fed rate hike for this month and September.
The commodity-linked Canadian Dollar may gain support from higher oil prices.

However, the upside of the Greenback could be restrained as traders price out any Federal Reserve rate hikes this month and in September. This shift in sentiment followed a cooling employment report that revealed fewer jobs added across April, May, and June than Wall Street had anticipated.

Furthermore, a recent drop in crude oil prices, driven by an OPEC+ production boost and a US-Iran peace deal, has alleviated broader inflationary pressures, softening the urgency for an aggressive Fed policy outlook.

The upside of the USD/CAD pair could be capped as the commodity-linked Canadian Dollar (CAD) gains support from higher oil prices. Although Canada is a major crude exporter, lower oil prices diminish foreign capital inflows, ultimately weighing on the loonie dollar.

West Texas Intermediate (WTI) oil price gains ground after registering modest losses in the previous day, trading around $69.40 per barrel at the time of writing. Crude oil prices received a temporary boost following reports that Iran fired at least two missiles at commercial vessels transiting the strategic waterway late Monday.

While two ships sustained significant damage, no casualties were reported. Separately, the UK Maritime Trade Operations (UKMTO) confirmed that a southbound tanker was struck on its port side by an unknown projectile, which ignited a fire on board.

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.