Canadian Dollar softens amid Middle East tension

USD/CAD edges higher to near 1.3750 in Tuesday’s Asian session.
Iran’s Foreign Minister said there was “no dialogue” between Tehran and Washington.
Higher crude oil prices could support the commodity-linked Loonie.

Lallalit Srijandorn FXStreet

The USD/CAD pair gathers strength to around 1.3750 during the Asian trading hours on Tuesday. Uncertainty and the ongoing US-Israel war on Iran continue to boost the US Dollar (USD) against the Canadian Dollar (CAD). The preliminary reading of the US S&P Global Purchasing Managers Index (PMI) for March will be released later on Tuesday.

US President Trump late Monday announced a five-day postponement of planned military strikes on Iranian energy infrastructure. Trump added that there are 15 points of agreement between the US and Iran after talks this weekend, per CNN. Nonetheless, Iranian officials denied any talks with the US following Trump's remarks.

Mohsen Rezaei, the senior military adviser to Iranian Supreme Leader Mojtaba Khamenei, said that the war will continue until Iran receives full compensation for the damage it has sustained. Signs of a prolonged conflict in the Middle East could underpin safe-haven currencies such as the Greenback in the near term.

Meanwhile, crude oil prices soared as traders reacted to Iran's denial of peace talks with the US. 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.

The US Federal Reserve (Fed) held interest rates steady at 3.50%–3.75% last week and expressed concern about the impact of rising oil prices on inflation. The BoC left its key overnight rate unchanged at 2.25% at its March meeting but warned that the outlook is highly uncertain and that the Iran conflict has heightened the risks to the global economy.

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.

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