USD/CAD consolidates below 1.3800 amid hopes of a US-Iran deal

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The US Dollar (USD) posts marginal losses against the Canadian Dollar (CAD) on Tuesday, and extends its decline to three-week lows below 1.3790 after dropping from a high of 1.3878 on Monday.

USD/CAD drifts below 1.3790 as investors remain hopeful of a peace deal in Iran.
The US blockade of Iranian ports is keeping Oil prices at relatively high levels.
In Canada, Prime Minister Carney has secured a majority government.

The US Dollar (USD) posts marginal losses against the Canadian Dollar (CAD) on Tuesday, and extends its decline to three-week lows below 1.3790 after dropping from a high of 1.3878 on Monday. Hopes of a resolution of the US-Iran conflict are weighing on the safe-haven USD, while the US blockade of the Strait of Hormuz keeps Oil prices from falling further, which provides support to the commodity-sensitive Loonie.

US President Donald Trump affirmed on Monday that the US military enforced a blockade of Iran’s ports, but he also affirmed that Iranian authorities have called asking to “work a deal”.

Beyond that, a Reuters report citing sources familiar with the peace process said on Monday that the US and Iran have left the door open to further dialogue, despite the failure of last weekend’s negotiations in Pakistan.

Oil prices are nearly 40% above pre-war levels

Meanwhile, the blockade of the Strait of Hormuz keeps Crude prices at relatively high levels. The price of the US benchmark West Texas Intermediate (WTI) barrel has dropped from highs near $99.00 on Monday to $92.00 on Tuesday, but is still nearly 40% above pre-war levels. Oil is Canada’s main export and, in that sense, higher prices tend to have a positive impact on the Loonie.

On the macroeconomic front, the focus on Tuesday will be on the US Producer Prices Index (PPI) report, which is expected to show the same trend as Friday’s Consumer Prices Index (CPI), highlighting the inflationary impact of the war in Iran and adding pressure on the Federal Reserve to partially reverse its easing cycle.

In Canada, Prime Minister Mark Carney has secured a majority in the parliament, following three special elections held on Monday. A report by CBC News says that the Carney’s Liberal Party obtained 173 of the 343 seats of the House of Commons, which will grant him a stronger mandate to oppose the tariffs and the annexation threats of his southern neighbour.

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.