Canadian Dollar gains as Oil prices rise on Strait of Hormuz closure

Canadian Dollar receives support from higher Oil prices amid the effective closure of the Strait of Hormuz.
WTI price climbed as tightening supply from the Iran conflict outweighed coordinated emergency reserve releases by major economies.
The US Dollar stays firm as surging energy prices raise inflation risks and reduce expectations of Fed rate cuts.

Akhtar Faruqui FXStreet

USD/CAD loses its recent gains registered in the previous session, trading around 1.3580 during the Asian hours on Thursday. The pair depreciates as the commodity-linked Canadian Dollar (CAD) gained support after the effective closure of the Strait of Hormuz highlighted Canada as a reliable energy supplier to the United States amid the Iran conflict.

West Texas Intermediate (WTI) oil price extends its gains for the third successive session, trading around $91.60 at the time of writing. Oil prices climb as the prospect of a protracted Iran war overshadowed a coordinated release of oil reserves by major economies. Markets also viewed the emergency oil release as insufficient even after the IEA agreed to its largest-ever release of 400 million barrels of oil.

Iran’s Islamic Revolutionary Guard Corps (IRGC) said it launched a joint operation with Lebanon's Hezbollah against targets in Israel, Jordan, and Saudi Arabia. Bahrain's Interior Ministry said on Thursday that Iran has targeted fuel tanks at a facility in Muharraq Governorate, one of Bahrain’s four administrative regions.

However, the downside of the USD/CAD pair could be restrained as the US Dollar (USD) remains stronger, as surging energy prices heightened inflationary risks and reduced the likelihood of Federal Reserve (Fed) interest rate cuts.

The February US Consumer Price Index (CPI) released on Wednesday showed inflation rising 0.3% month-over-month (MoM) and 2.4% year-over-year (YoY), largely in line with market expectations. Core CPI, which excludes food and energy, increased 0.2% MoM and 2.5% YoY.

The relatively steady inflation figures reduced fears of a sudden surge in price pressures and reinforced expectations that the Federal Reserve may keep interest rates steady in the near term. Analysts note that the latest CPI report does not yet fully reflect the recent surge in oil prices caused by geopolitical developments. US Personal Consumption Expenditures (PCE) will be eyed on Friday.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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