Canadian Dollar steadies as oil prices rise

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USD/CAD inches higher after posting minor gains in the previous day, trading around 1.3950 during the Asian hours on Wednesday.

USD/CAD may depreciate as the commodity-linked Canadian Dollar could gain support from higher oil prices.
The US Dollar remained firm on heightened risk aversion following renewed geopolitical tensions in the Middle East.
The US launched third-wave retaliatory strikes on Iranian coastal targets Wednesday following an Iranian ballistic missile attack from Isfahan.

USD/CAD inches higher after posting minor gains in the previous day, trading around 1.3950 during the Asian hours on Wednesday. The pair may depreciate 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).

Crude oil prices advanced in earlier hours as intensifying Middle East conflicts renewed severe supply anxieties. Following a brief drop in prices on Tuesday when Israel and Iran temporarily suspended hostilities, the conflict quickly escalated again. According to reports, the US launched a third wave of retaliatory strikes on Iranian coastal targets on Wednesday after Iran fired at least three ballistic missiles from Isfahan. This followed an initial round of US strikes on Tuesday, which Washington called a proportional response to Iran downing a US helicopter gunship near the critical Strait of Hormuz.

The USD/CAD pair holds ground as the US Dollar (USD) remains firm amid increased risk aversion following renewed tensions in the Middle East. Reuters reported on Tuesday that the US launched strikes against Iran after US President Donald Trump said Tehran had shot down a US Apache helicopter in the Strait of Hormuz. Early Tuesday, Trump emphasized that Iran and the US are close to an agreement, though there have been few signs of progress since a tenuous ceasefire took effect in early April.

Uncertainty surrounding the Middle East peace deal continues to fuel concerns over inflation and expectations of elevated interest rates. Stronger-than-expected US May jobs data have boosted expectations of a Federal Reserve (Fed) rate hike this year.

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.