Canadian Dollar bounces off late March low vs softer USD; weak Oil prices cap gains

USD/CAD attracts some sellers during the Asian session, though it lacks follow-through.
The end of Israel-Iran hostilities undermines the safe-haven USD and weighs on the pair.
Hawkish Fed bets limit USD losses, while weaker Crude Oil prices cap gains for the Loonie.

Haresh Menghani FXStreet

The USD/CAD pair edges lower during the Asian session on Tuesday, eroding part of the previous day's gains to its highest level since late March. Spot prices, however, lack follow-through selling and currently trade just below mid-1.3900s, down less than 0.05% for the day.

Iran and Israel announced on Monday that they had halted attacks against each other, supporting the global risk sentiment and dragging the safe-haven US Dollar (USD) away from a two-month high. This, in turn, is seen as a key factor acting as a headwind for the USD/CAD pair. Meanwhile, easing geopolitical tensions weigh on Crude Oil prices, which undermines the commodity-linked Loonie and helps limit the downside for the currency pair.

The market optimism, however, remains limited amid major US-Iran disagreements over Tehran's nuclear program and the Strait of Hormuz. This, along with hawkish US Federal Reserve (Fed) expectations, might hold back the USD bears from placing aggressive bets. Traders are now pricing in over a 70% chance of a Fed rate hike in 2026, and the bets were reaffirmed by Friday's upbeat US jobs data. This could lend support to the USD and the USD/CAD pair.

The attention this week will be on the closely-watched US Consumer Price Index (CPI) and Producer Price Index (PPI) reports for May, scheduled on Wednesday and Thursday, respectively. The crucial US inflation figures will play a key role in influencing expectations about the Fed's future policy path and drive the USD demand. Moreover, developments surrounding the Middle East crisis and Oil price dynamics should provide some impetus to the USD/CAD pair.

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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