Canadian Dollar consolidates below 1.4050 vs USD as rebounding oil prices cap upside

USD/CAD is seen consolidating the previous day’s recovery gains amid mixed cues.
Recovering oil prices underpins the Loonie and acts as a headwind for spot prices.
The US-Iran uncertainty benefits the safe-haven USD and lends support to the pair.

Haresh Menghani FXStreet

The USD/CAD pair struggles to capitalize on the previous day's modest recovery gains and oscillates in a narrow band during the Asian session on Tuesday. Spot prices currently trade just below the 1.4050 level, nearly unchanged for the day, amid mixed fundamental cues.

The uncertainty over US-Iran talks helps crude oil prices gain some positive traction, which underpins the commodity-linked Loonie and acts as a headwind for the USD/CAD pair. The safe-haven US Dollar (USD), on the other hand, benefits from fading optimism over a potential US-Iran peace deal, lending some support to the currency pair. In the latest developments, Iran said on Monday there were no talks underway with the US and also no plans for any meetings.

This contradicted US President Donald Trump, who has cited resumption of negotiations as justification for calling off attacks over the weekend. Moreover, unconfirmed reports of drone strikes on US assets in Kuwait prompt traders to again price in the geopolitical risk premium. This, in turn, assists the safe-haven Greenback to preserve the previous day's solid recovery gains from its June 17 low and holds back USD/CAD bears from placing fresh bets.

Meanwhile, the US-Iran standoff over the Strait of Hormuz, along with Houthi rebels' naval blockade against Saudi Arabia, fuels concerns regarding global energy supplies and triggers a modest uptick in crude oil prices. This could revive inflation fears and keep bets for at least one interest rate hike by the US Federal Reserve (Fed) firmly on the table, which favors USD bulls and warrants caution before positioning for any meaningful decline for the USD/CAD pair.

Rabobank’s Benjamin Picton characterises the recurring pattern around the Strait of Hormuz as a kind of “Groundhog Day” for markets, warning that “later in the week strikes typically resume, oil prices rally, equities sell, and bond yields rise.” He adds that while “there is every chance of that happening this week,” for now the market is left with the impression of “‘strikes for strikes’,” as participants weigh the risk of renewed escalation against the current lull.

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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