Canadian Dollar consolidates around 1.3800 against USD as Mideast uncertainties persist

USD/CAD remains confined in a narrow range for the second consecutive day on Tuesday.
Geopolitical risks and hawkish Fed bets revive the USD demand, lending support to the pair.
Recovering Crude Oil prices underpin the Loonie and cap any further gains for spot prices.

Haresh Menghani FXStreet

The USD/CAD pair extends its sideways consolidative price move for the second consecutive day and trades around the 1.3800 mark during the Asian session on Tuesday. Spot prices, however, remain close to the highest level since April 13, touched last week.

The US Dollar (USD) attracts fresh buyers following the previous day's fall to over a one-week low amid persistent geopolitical uncertainties and acts as a tailwind for the USD/CAD pair. The US and Iran remained at odds over key issues, including the Strait of Hormuz and Tehran's nuclear program, capping the optimism over a potential deal to end a nearly three-month-old war and benefiting the safe-haven buck.

In the latest development, Fox News reported that US forces ‌conducted "self-defense strikes" in southern Iran on Monday. This keeps geopolitical risks in play, which, along with hawkish US Federal Reserve (Fed) expectations, offers some support to the Greenback. However, a modest recovery in Crude Oil prices underpins the commodity-linked Loonie and holds back bulls from placing fresh bets on the USD/CAD pair.

Hence, it will be prudent to wait for a sustained strength and acceptance above a technically significant 200-day Simple Moving Average (SMA) before traders start positioning for an extension of the recent move up from the monthly swing low. Moving ahead, Tuesday's release of the Conference Board's US Consumer Confidence Index might influence the USD price dynamics and provide some impetus to the USD/CAD pair.

The market focus, however, will remain glued to the US Personal Consumption Expenditure (PCE) Price Index and the second estimate of the US GDP growth, due for release on Thursday. Apart from this, fresh developments surrounding the Middle East crisis might continue to infuse volatility in the financial markets and contribute to producing some meaningful trading opportunities around 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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