Canadian Dollar pares losses vs USD as rallying oil prices counter hawkish Fed bets

USD/CAD struggles to build on its modest gains amid a combination of factors.
The door for further diplomacy remains open, capping the USD and the major.
Rallying Oil prices underpin the Loonie and act as a headwind for spot prices.

Haresh Menghani FXStreet

The USD/CAD pair retreats a few pips from the Asian session high and currently trades around the 1.3860-1.3855 region, up around 0.15% for the day. Meanwhile, the mixed fundamental backdrop warrants caution before positioning for an extension of a modest recovery from sub-1.3800 levels, or over a two-week low set on Friday.

The US Dollar (USD) struggles to capitalize on the weekly bullish gap opening amid reports that regional countries are racing to bring the US and Iran back to the negotiating table within days. This keeps the door open for further diplomacy and caps the safe-haven Greenback. Moreover, an intraday rally in Crude Oil prices underpins the commodity-linked Loonie and contributes to capping the USD/CAD pair.

West Texas Intermediate (WTI) – the benchmark US Crude Oil price – rallies back to the $105/barrel mark in reaction to failed US-Iran peace talks over the weekend. In fact, US Vice President JD Vance said that he placed a final and best offer on the table, but Iran declined to accept the terms, leading to a stalemate. Meanwhile, Iranian state media said that excessive demands sank the possibility of an agreement.

Furthermore, US President Donald Trump said that the US Navy would start blockading the Strait of Hormuz, jeopardizing a fragile two-week ceasefire. Adding to this, continued Israeli strikes in Lebanon raise the risk of a renewed escalation of tensions in the Middle East and support oil prices. However, hawkish US Federal Reserve (Fed) bets should limit deeper losses for the buck and the USD/CAD pair.

Data released on Friday showed that inflation in the US surged by the most in nearly four years during March. Apart from this, the war-driven surge in elevated energy prices led investors to abandon bets on Fed rate cuts and shift focus to potential interest rate hikes this year. The outlook triggers a fresh leg up in US Treasury bond yields, which favors the USD bulls and acts as a tailwind for the USD/CAD pair.

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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