The USD/CAD pair is falling a few pips from a three-day high hit during Thursday’s Asian session, although it lacks a follow-up amid mixed fundamental evidence. Despite a temporary extension of the US-Iran ceasefire, a standoff in the Strait of Hormuz is supporting the safe-haven US dollar and the currency pair. However, rising crude oil prices are supporting commodity-linked loonie and cap spot prices.
US President Donald Trump announced on Tuesday that he would extend the ceasefire with Iran indefinitely, hours before it expires, and reiterated that the US Navy’s blockade of Iranian ports would continue. Iran, on the other hand, has made lifting the US naval blockade a strict condition for resuming negotiations. In addition, Iran’s Revolutionary Guards said they fired on three ships and seized two in the Strait of Hormuz. This keeps geopolitical risks in play and helps the USD maintain its gains recorded over the last two days, which in turn is seen as support for the USD/CAD pair.
However, the USD lacks bullish conviction as hawkish expectations from the US Federal Reserve (Fed) ease and renewed bets are made for a rate cut by year-end. In contrast, money markets have priced in the possibility of a rate hike by the Bank of Canada (BoC) in April. Additionally, continued signs of US-Iran tensions are pushing crude oil prices higher for the third day in a row, which in turn benefits the Canadian dollar (CAD) and keeps the USD/CAD pair under control. Therefore, it is advisable to wait for strong follow-on buying before confirming that spot prices have bottomed in the near future.
Market participants now look forward to the US economic filing with the release of the usual weekly initial jobless claims and flash PMI data later in the North American session. The data could boost USD demand, which along with oil price dynamics should give the USD/CAD pair some momentum. However, the focus will remain on geopolitics, which could continue to cause volatility in global financial markets and help create some meaningful trading opportunities.
Frequently asked questions about the Canadian dollar
The key factors affecting 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 and Canada’s imports. Other factors include market sentiment – whether investors are adopting riskier assets (risk-on) or seeking safe havens (risk-off) – with risk-on being CAD positive. As the country’s largest trading partner, the health of the U.S. economy is also a key influencer for the Canadian dollar.
The Bank of Canada (BoC) has significant influence over the Canadian dollar by setting the level of interest rates banks can lend to each other. This affects the level of interest rates for everyone. The BoC’s main goal is to keep inflation at 1-3% by raising or lowering interest rates. Relatively higher interest rates tend to have a positive impact on the CAD. The Bank of Canada can also use quantitative easing and tightening measures to influence credit conditions, the former being CAD negative and the latter CAD positive.
Oil prices are a key factor affecting the value of the Canadian dollar. Petroleum is Canada’s largest export, so the price of oil tends to have a direct impact on the CAD value. Generally, when the price of oil rises, the CAD also rises as the overall demand for the currency increases. The opposite is true when oil prices fall. Higher oil prices also tend to lead to a greater likelihood of a positive trade balance, which also has a positive impact on the CAD.
While inflation has traditionally always been viewed as a negative factor for a currency as it lowers the value of money, in modern times with the easing of cross-border capital controls the opposite is actually the case. Higher inflation tends to cause central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to store their money. This increases the demand for the national currency, in the case of Canada the Canadian dollar.
The release of macroeconomic data measures 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 this attract more foreign investment, but it could also encourage the Bank of Canada to raise interest rates, resulting in a stronger currency. However, if economic data is weak, the CAD is likely to fall.
