Canadian Dollar steadies as higher oil prices offset US Dollar gains

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USD/CAD remains subdued for the seventh consecutive day, trading around 1.3640 during the Asian hours on Tuesday.

USD/CAD may struggle further as the commodity-linked Canadian Dollar gains support from higher oil prices.
Crude oil prices rise on supply concerns amid persistent uncertainty over US–Iran ceasefire talks.
President Trump signaled mixed views on the Iran war, saying he is not in a hurry to end it.

USD/CAD remains subdued for the seventh consecutive day, trading around 1.3640 during the Asian hours on Tuesday. The pair may further struggle as the commodity-linked Canadian Dollar (CAD) could receive support from higher oil prices, given Canada’s status as the largest crude exporter to the United States (US).

West Texas Intermediate (WTI) Oil price extends its gains for the second successive day, trading around $86.10 per barrel at the time of writing. Crude oil prices gain amid rising supply concerns, driven by persistent uncertainty surrounding US–Iran ceasefire negotiations. However, reports suggest that Iran will send a delegation to Islamabad for a second round of negotiations with the US before the current two-week ceasefire expires.

The downside of the USD/CAD pair could be restrained as the US Dollar (USD) receives support on rising safe-haven demand amid geopolitical uncertainty. US President Donald Trump has delivered conflicting signals regarding the future course of the war with Iran, indicating that he is not in a hurry to bring the conflict to an end. At the same time, Trump voiced optimism that a fresh round of negotiations with Tehran could take place in Pakistan soon, even as the current 14-day ceasefire is due to expire on Wednesday.

Iranian Parliament Speaker Mohammad Bagher Ghalibaf stated on Tuesday that Iran will not engage in negotiations with the United States (US) while facing threats, according to reports. Meanwhile, Iranian Foreign Minister Abbas Araghchi emphasized that what he described as “continued violations of the ceasefire” by the US represent a significant barrier to advancing the diplomatic process.

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.