Canadian Dollar draws support from higher oil prices

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USD/CAD depreciates after two days of gains, trading around 1.3900 during the Asian hours on Friday. The pair declines as the commodity-linked Canadian Dollar (CAD) gains support from rising oil prices.

USD/CAD declines as rising oil prices support the commodity-linked Canadian Dollar.
WTI rises as Oman suspends Mina al Fahal loading operations following an explosion near its single-buoy mooring berths.
The US Dollar holds firm as traders evaluated developments surrounding a potential US-Iran peace agreement.

The surge in crude followed a suspension of loading operations at Oman's Mina al Fahal terminal on the Gulf of Oman, triggered by an explosion near its single-buoy mooring berths. According to two sources familiar with the matter, the incident is suspected to be a drone attack.

The downside of the USD/CAD pair could be restrained as the US Dollar (USD) maintained its firm footing as traders assessed ongoing developments surrounding a potential US-Iran peace agreement to end recent hostilities. Tensions remain high as Iranian Foreign Minister Abbas Araghchi warned that the Strait of Hormuz falls within Iranian and Omani territorial waters, declaring US regional bases as active targets for retaliation.

US President Donald Trump offered an optimistic outlook early Wednesday, stating that Iran is close to signing a peace framework and that a breakthrough could occur over the weekend. Adding to the regional complexity, Israeli Defense Minister Israel Katz affirmed on Thursday that Israel will sustain military operations in Lebanon despite a ceasefire, preventing displaced residents from returning.

The US Dollar also drew support from a resilient domestic labor market, bolstered by stronger-than-expected May ADP private payrolls and JOLTS job openings data released earlier in the week.

Market participants are now awaiting the upcoming US Nonfarm Payrolls (NFP) report for fresh direction. Present projections indicate that the US economy added 85,000 jobs in May, with the unemployment rate expected to hold steady at 4.3%.

Any positive surprises or signs of further labor market strength could prompt traders to bet that the Federal Reserve (Fed) will maintain interest rates higher for longer. Markets are now pricing in nearly a 42% chance of a Fed rate hike in December, according to the CME FedWatch Tool.

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.