Canadian Dollar slides back to 1.3750 vs firmer USD as Iran peace hopes cap Oil

USD/CAD attracts some dip-buyers during the Asian session amid a modest US Dollar uptick.
Hopes for a US-Iran peace deal cap Oil prices, undermining the Loonie and supporting the pair.
Traders now look forward to the latest Canadian consumer inflation figures for a fresh impetus.

Haresh Menghani FXStreet

The USD/CAD pair edges higher during the Asian session on Tuesday, stalling the previous day's modest pullback from the vicinity of a one-month peak, around the 1.3765 region, touched last week. Spot prices, however, lack bullish conviction and currently trade just below the mid-1.3700s, up less than 0.05% for the day amid mixed fundamental cues.

The market sentiment remains fragile on the back of a protracted US-Iran standoff over the Strait of Hormuz and the lack of progress in peace talks amid major disagreements over Tehran's nuclear program. Adding to this, expectations for a more hawkish US Federal Reserve (Fed) assist the US Dollar (USD) to attract some dip-buyers following the previous day's sharp retracement slide from the highest level since April 7. This, in turn, is seen as a key factor acting as a tailwind for the USD/CAD pair.

Meanwhile, US President Donald Trump called off a planned military strike on Iran after Saudi Arabia, Qatar, the UAE, and other regional parties requested a two-to-three-day delay. Furthermore, Trump said that there is a good chance an Iran nuclear deal can be reached. The optimism keeps Crude Oil prices below a two-week high set on Monday, which undermines the commodity-linked Loonie and further lends support to the USD/CAD pair. The lack of follow-through, however, warrants caution for bulls.

Investors now seem hesitant and opt to move to the sidelines ahead of the release of the latest consumer inflation figures from Canada, due later during the North American session. The crucial data will play a key role in influencing expectations about the Bank of Canada's (BoC) policy outlook and drive the Canadian Dollar (CAD). Apart from this, developments surrounding the Middle East crisis would inject volatility in the financial markets and contribute to producing trading opportunities around 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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