USD/CAD extends losses to 1.3670 with all eyes on the US-Iran peace talks

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The US Dollar (USD) keeps heading south against the Canadian Dollar (CAD) on Friday, reaching three-week lows at 1.3670.

USD/CAD hits fresh three-week lows at 1.3670 following a five-day sell-off.
Hopes of a resolution of the US-Iran conflict keep the safe-haven USD under pressure.
Canada's CPI figures, due on Monday, are expected to show higher inflationary pressures in March.

The US Dollar (USD) keeps heading south against the Canadian Dollar (CAD) on Friday, reaching three-week lows at 1.3670. The USD/CAD pair has depreciated continuously over the last five days and is on track for a 1.3% weekly selloff, as hopes that the US and Iran will resume peace talks this weekend are keeping the safe-haven US Dollar under pressure.

News from the Middle East is mixed, but the market keeps focusing on US President Donald Trump’s positive comments. Trump announced on Thursday a 10-day ceasefire between Lebanon and Israel and affirmed that a deal to end hostilities in Iran is “very close.”

A news report by Reuters, on the other hand, has cooled hopes of a steady peace agreement coming out of this weekend’s negotiations. Iranian sources cited in the report suggest that negotiators have scaled back their targets and are now seeking a “temporary memorandum” to avoid a return to the conflict.

Meanwhile, the Strait of Hormuz remains closed, keeping Crude prices about 35% above pre-war levels. The Governor of the Bank of Canada (BoC), Tiff Macklem, warned on Thursday about “higher price levels” in a conference at the Montreal Chamber of Commerce and highlighted the challenges to keeping inflation anchored without triggering a recession.

In that sense, Canadian Consumer Prices Index (CPI) figures from March, due on Monday, are expected to validate those fears. Consumer inflation is expected to have accelerated significantly, amid the energy shock triggered by Iran’s war. If the final figures meet the expectations, concerns about stagflation might take a toll on the Canadian Dollar’s strength.

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.