Canadian Dollar struggles as oil prices stabilize following a sharp decline

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USD/CAD inches higher for the third consecutive day, trading around 1.3750 during the Asian hours on Thursday.

USD/CAD edges higher as the Canadian Dollar struggles, with WTI price steadying after a nearly 5% plunge on Wednesday.
Crude oil prices declined after President Donald Trump said US-Iran negotiations are in their final stages.
FOMC Meeting Minutes showed a majority of Fed officials warned they might raise interest rates if inflation stays above 2%.

USD/CAD inches higher for the third consecutive day, trading around 1.3750 during the Asian hours on Thursday. The commodity-linked Canadian Dollar (CAD) struggles against the US Dollar as the West Texas Intermediate (WTI) oil price remains steady after registering a nearly 5% losses in the previous day. Crude oil prices declined after a Bloomberg report on Wednesday, indicating that US President Donald Trump characterized the ongoing negotiations with Iran as being in their final stages.

However, President Trump also reiterated a firm pledge to resume military actions within days if Iran rejects his terms. In response, Iranian President Masoud Pezeshkian emphasized that Tehran has no intention of capitulating, stating on the social media platform X that attempting to force a surrender through coercion is nothing more than an illusion.

Tehran is currently evaluating Washington’s latest draft response to its 14-point proposal, delivered via Pakistani intermediaries. A potential diplomatic breakthrough would likely resolve the "dual blockade" crisis by prompting both nations to lift their respective naval restrictions on commercial shipping through the Strait of Hormuz, where vital tanker traffic has faced severe disruptions since March.

The USD/CAD pair gains ground as the US Dollar (USD) holds steady, as traders are closely monitoring the economic implications of peace negotiations between the United States (US) and Iran, alongside heightened threats to the critical Strait of Hormuz shipping lane.

The Greenback may receive support as the Minutes of the April Federal Open Market Committee (FOMC) meeting were released on Wednesday, indicating a hawkish tone surrounding the Fed outlook. The majority of Federal Reserve (Fed) officials warned the central bank would likely need to consider raising interest rates if inflation continued to run persistently above their 2% target. The minutes highlighted the deepening concern among Fed officials about inflationary pressures driven by the Iran war.

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.