Canadian Dollar edges higher to near 1.4000 as crude oil gains

USD/CAD declines to around 1.4005 in Monday’s Asian session.
Iran said it targeted US aircraft in Jordan.
Cooling in June’s US inflation data slashed the immediate odds of a Fed July rate hike.

Lallalit Srijandorn FXStreet

The USD/CAD pair extends its downside to near 1.4005 during the Asian trading hours on Monday. Rising crude oil prices provide some support to the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). Traders brace for the release of Canada’s Consumer Price Index (CPI) inflation data later on Monday.

The Guardian reported on Monday that US President Donald Trump said that the latest US strikes on Iran were being carried out in honor of US service members killed in recent days. Meanwhile, Iran's Islamic Revolutionary Guard Corps (IRGC) said that the Strait of Hormuz will not be safe for petrochemical products or 'single drop of oil and gas' transit as long as US actions in the region continue. The Iranian military added that it targeted US aircraft at Jordan's Aqaba airport with ballistic missiles.

Air raid sirens sounded across Bahrain after Iran carried out a fresh wave of ballistic missiles and one-way attack drones targeting sites in Bahrain, Jordan, Kuwait and Iraq. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.

Traders reduce their bets on the US interest rate hike in July after signs of softer inflation in the US, which could weigh on the Greenback. The odds for a Federal Reserve (Fed) rate hike in July stood at 14%, versus a 25% implied chance last week, according to the CME FedWatch tool. However, Fed Governor Christopher Waller warned that policymakers need to see "several months" of sustained cooling before taking rate hikes off the table.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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