Canadian Dollar holds steady amid Middle East tensions, rising oil prices

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The USD/CAD pair trades on a flat note near 1.3725 during the early Asian trading hours on Monday. Traders will closely monitor the situation in the Middle East. Additionally, traders weigh a hawkish hold from the Federal Reserve (Fed) against a dovish hold from the Bank of Canada (BoC).

USD/CAD flat lines around 1.3725 in Monday’s early Asian session.
Trump weighs military moves on Iran’s Kharg Island.
A rise in crude oil prices could support the commodity-linked Loonie.

Broader risk-off sentiment amid escalating tensions between the United States (US) and Iran has led to safe-haven demand for the US Dollar (USD) against the Canadian Dollar (CAD). The US is considering launching a ground military operation to seize the Iranian island of Kharg, the Jerusalem Post reported early Monday. A US official confirmed to the Post that “the US military has accelerated the deployment of thousands of Marines and Navy personnel to the Middle East.”

The US Federal Reserve (Fed) left interest rates unchanged at 3.50%–3.75% last week and expressed concern about the impact of rising oil prices on inflation. Meanwhile, the BoC maintained its key overnight rate at 2.25% at its March meeting but warned that the outlook is highly uncertain and that the Iran conflict has heightened the risks to the global economy.

On the other hand, rising tensions surrounding the US-Israeli conflict with Iran rattled global markets and pushed oil prices above the $100 per barrel mark. It is worth noting that Canada is a major oil-exporting country, and higher crude oil prices generally have a positive 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.