Canadian Dollar retreats on sliding oil prices as USD recovers on Fed bets, Mideast risks

USD/CAD attracts some buyers amid a goodish USD recovery from the lowest level since June 17.
Escalating US-Iran tensions keep inflation risks and Fed hike bets in play, supporting the Greenback.
Supply concerns act as a tailwind for oil prices, underpinning the Loonie and capping spot prices.

Haresh Menghani FXStreet

The USD/CAD pair edges higher during the Asian session on Friday and, for now, seems to have snapped a three-day losing streak to the lowest level since June 17, touched the previous day. Spot prices currently trade above the 1.4000 psychological mark, though the intraday uptick lacks bullish conviction.

As investors look past Thursday's unimpressive US macro data, the US Dollar (USD) regains some positive traction amid prospects for at least one interest rate hike by the US Federal Reserve (Fed) and offers some support to the USD/CAD pair. The Advance US GDP report showed moderating economic growth in the second quarter, while the US Personal Consumption Expenditures (PCE) Price Index pointed to signs of cooling inflation, tempering hawkish Fed expectations.

However, volatile crude oil prices suggest that inflation remains a concern, which could force the US central bank to adopt a more hawkish stance. Adding to this, escalating US-Iran tensions and the risk of a broader regional conflict in the Middle East act as a tailwind for the safe-haven USD. In the latest development, the US military announced it had completed a heavy wave of strikes against Iranian targets, in response to Tehran's missile attacks on American forces earlier this week.

Meanwhile, Iran rejected Oman's proposal, which would see Tehran partially control the Strait of Hormuz and collect voluntary fees for using the waterway. Furthermore, On the other hand, repeated attacks by Yemen's Houthi militias in the Bab al-Mandab Strait, the Red Sea, and the Gulf of Aden add to concerns about disruptions to global energy supplies. This, in turn, could lend support to crude oil prices and underpin the commodity-linked Loonie, warranting some caution for 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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