USD/CAD remains capped below 1.3660 lows as higher crude prices support the Loonie
- Canadian Dollar reversals remain limited with Oil prices above $70.
- The US Dollar has given away most of the gains taken after Israel's attack on Iran.
- USD/CAD remains unable to put a significant distance from year-to-date lows at 3.3590.
The US Dollar rallied on early trade on Friday, boosted by the risk-averse reaction to Israel’s attack on Iran, but was capped at 1.3660 before returning to levels close to 1.3600 as the escalating Oil prices have pushed the Canadian Dollar higher.
Crude prices have surged on concerns that escalating tensions between Iran and Israel might disrupt Oil traffic through the strategic Strait of Hormuz, leading to significant restrictions in global supply.
Higher Oil prices underpin the CAD
The US benchmark WTI Oil surged more than 10% following the first Israeli strike on Iran, before pulling back gradually, but it still remains at two-week highs above the psychological $70 level, in track for an 11% weekly appreciation.
Oil is Canada’s main export, and higher crude prices are likely to keep the Canadian Dollar underpinned. The US Dollar rally has failed to alter the broader USD/CAD bearish trend, which has taken the pair to explore year-to-date lows below 0.3600 earlier this week.
Macroeconomic data has not been particularly supportive for the US Dollar this week. Consumer prices were stronger than expected in a trend that was confirmed by producer prices on Thursday, and fed hopes of Fed easing in September. The US Dollar retreated sharply following the data.
Canadian Dollar FAQs
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.
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.
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.
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.
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.