Canadian Dollar edges higher vs USD; Oil slump cap gains amid Iran peace deal hopes

USD/CAD retreats slightly from over a one-month high, though the downside seems cushioned.
US-Iran peace deal hopes weigh on the USD, while a slump in Oil prices undermines the Loonie.
Traders also appear hesitant amid thin liquidity on the back of a holiday in global markets.

Haresh Menghani FXStreet

The USD/CAD pair kicks off the new week on a weaker note, eroding a part of Friday's strong gains to the 1.3825 region, or the highest level since April 13. Spot prices, however, lack follow-through selling and stabilize around the 1.3800 round figure amid mixed cues.

The US Dollar (USD) opens with a bearish gap amid reviving hopes for a potential US-Iran peace deal, which, in turn, is seen as a key factor exerting some pressure on the USD/CAD pair. Meanwhile, Crude Oil prices fall sharply in reaction to the optimism over Iran diplomacy, undermining the commodity-linked Loonie and acting as a tailwind for the currency pair.

However, the US and Iran remained at odds over key issues, including blockades on the Strait of Hormuz and Tehran's nuclear program. Adding to this, US President Donald Trump said on Sunday that he had told his representatives not to rush into any deal with Iran. This, along with hawkish US Federal Reserve (Fed) expectations, should help limit USD losses.

Following sticky inflation data and remarks from Fed officials, traders are heavily pricing in the possibility that the US central bank will raise interest rates by at least a 25 basis point (bps) by the year-end. This might hold back the USD bears from placing aggressive bets, backing the case for the emergence of some dip-buying at the USD/CAD pair at lower levels.

Meanwhile, the liquidity is likely to remain low as global markets are observing several key holidays. This could lead to some volatility and produce short-term trading opportunities. The focus, however, will remain on further developments surrounding the Middle East crisis. In the meantime, the fundamental backdrop seems tilted in favor of the USD/CAD bulls.

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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