Canadian Dollar gains ground on rising oil prices, Fed rate decision looms

USD/CAD trades with mild losses near 1.3685 in Tuesday’s Asian session.
Higher crude oil prices underpin the commodity-linked Canadian Dollar.
The Fed is expected to keep its benchmark interest rate unchanged when it concludes its two-day meeting on Wednesday.

Lallalit Srijandorn FXStreet

The USD/CAD pair posts modest losses around 1.3685 during the Asian trading hours on Tuesday. The ongoing conflict in the Middle East provides some support to the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). The US Federal Reserve (Fed) interest rate decision will take center stage later on Wednesday.

Escalating tensions surrounding the US-Israeli conflict with Iran rattled global markets and pushed oil prices above the $100 per barrel mark. Retaliatory Iranian attacks across the region on ships, infrastructure and ports through which oil tankers transit raise fears of oil supply disruption. It is worth noting that Canada is a major oil-exporting country, and higher crude oil prices generally have a positive impact on the CAD.

Nonetheless, disappointing Canadian employment data could drag the Loonie lower and act as a tailwind for the pair. Canada's economy unexpectedly lost a net 83,900 jobs in February, while the unemployment rate rose to 6.7% during the same period, according to Statistics Canada data released on Friday.

The Iran war is complicating the outlook for the Fed, which is set to meet on Wednesday for its next interest rate decision. Traders see no chance of a Fed rate reduction at its March policy meeting on Wednesday, from the current range of 3.5% to 3.75%.

Fed Chair Jerome Powell’s remarks after the rate decision will also be in the spotlight. The press conference on Wednesday may be Powell’s second to last, as his term as chair is set to end in May. Any hawkish comments from Powell could help limit the Greenback’s losses in the near term.

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.

AUD/USD treads water above 0.7000 ahead of the RBA

AUD/USD alternates gains with losses just above the 0.7000 yardstick ahead of the opening bell in Asia on Tuesday. The pair’s decline follows the Greenback’s decent advance in a context of heightened geopolitical effervescence. Moving forward, the RBA is expected to hike its OCR to 4.60%.

USD/JPY climbs back toward 158.00 after BoJ minutes amid firm USD

USD/JPY finds dip-buyers and reverses part of Friday's slide driven by speculation that authorities will step in again to prop up the Japanese Yen. However, the BoJ's dovish Minutes cap the JPY. Meanwhile, the US Dollar regains traction as the US-Iran standoff supports crude oil prices, fueling inflation fears and reaffirming bets for an October Fed rate hike. This further supports the pair, driving it back toward 158.00.

Gold tumbles further; focus shifts to $4,100

Gold kicks in the week on the back foot, selling off to the vicinity of the $4,100 mark per troy ounce, levels last traded back in early August. The resurgence of geopolitical concerns in combination with the firmer US Dollar and rising US Treasury yields keep the yellow metal under heavy pressure on Monday.

Strategy buys 1,665 Bitcoin amid renewed geopolitical tensions

Bitcoin (BTC) dropped below $84,000 on Monday as Strategy (MSTR) announced a fresh treasury purchase of $143 million last week, boosting its holdings to 847,666 BTC. The company purchased 1,665 BTC for roughly $142.7 million, according to a filing with the Securities and Exchange Commission (SEC) on Monday.

The week ahead: A key moment for the global economy as threats rise

UK diesel hits a record, as economic concerns rise. The market expects an aggressive Fed rate hiking cycle, but is it necessary? Oil supply concerns ease, even as oil prices rise. What’s next for the AI trade.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Fed and the BoJ have just done something remarkably similar. Both central banks raised interest rates by 25 bps last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.