Canadian Dollar receives support from higher oil prices

USD/CAD drops as the Canadian Dollar gains support from WTI crude holding gains near $86.00.
President Trump downplayed immediate Tehran talks and pledged to respond to any Houthi waterway interference without specifying actions.
Markets are currently pricing in over 69% odds of a 25 basis-point Fed rate hike this September, per CME FedWatch.

Akhtar Faruqui FXStreet

USD/CAD declines after to days of gains, trading around 1.4100 during the early European hours on Wednesday. The pair loses ground as the commodity-linked Canadian Dollar (CAD) receives support from higher oil prices.

West Texas Intermediate (WTI) oil price gains ground for the second successive day, trading around $86.00 per barrel at the time of writing. Crude oil prices surge as supply risks intensified across several key export routes, extending well beyond the Middle East.

US President Donald Trump downplayed the likelihood of immediate negotiations with Tehran, pledging to respond if the Houthi militants interfered with the waterway, though he did not outline specific action. In response, Iran's top military command stated via the Xinhua news agency that Tehran will expand its strikes to target US and allied assets across the region if the US attacks Iranian nuclear facilities.

The USD/CAD pair holds ground as the US Dollar (USD) struggles despite growing risk aversion tied to escalating geopolitical tensions between the United States and Iran. However, the Greenback may regain its ground as CME FedWatch Tool indicates that markets are currently pricing in over 69% odds of at least a 25 basis-point rate hike at the upcoming September meeting. However, the Fed is widely expected to leave the federal funds rate unchanged. Despite this anticipated pause, expectations for tighter policy remain elevated beyond July.

Fed Chair Warsh has repeatedly stressed that inflation remains a key concern for the central bank. This cautious stance has been echoed by several other Fed officials in recent weeks as they navigate ongoing economic pressures. Policymakers have now entered their customary blackout period ahead of next week's FOMC meeting.

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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