Canadian Dollar steadies as Oil prices strengthen on Strait of Hormuz closure

Canadian Dollar may receive support from higher Oil prices.
WTI rises after adviser to Islamic Revolutionary Guard Corps says Strait of Hormuz is closed.
US Dollar could strengthen as President Trump warns the “big wave” of strikes against Iran is still to come.

Akhtar Faruqui FXStreet

USD/CAD holds ground after registering modest gains in the previous session, trading around 1.3670 during the Asian hours on Tuesday. However, the pair depreciated as the commodity-linked Canadian Dollar (CAD) received support from higher Oil prices. Canada’s status as a major crude exporter makes its currency particularly sensitive to movements in Oil prices.

West Texas Intermediate (WTI) Oil price gains ground and is trading around $71.60 per barrel at the time of writing. Crude Oil prices remain stronger on supply concerns due to the Middle East war.

A Reuters report cited Ebrahim Jabari, senior adviser to the commander-in-chief of the Islamic Revolutionary Guard Corps (IRGC), as saying: “The Strait of Hormuz is closed. If anyone tries to pass, the heroes of the Revolutionary Guards and the regular navy will set those ships ablaze.”

The CAD may draw support from higher Oil prices, which have reignited concerns about a fresh inflation wave in Canada, as investors fear rising energy costs could force central banks to keep interest rates higher for longer.

The upside of the USD/CAD pair could be limited as the US Dollar (USD) could further appreciate amid safe-haven demand linked to escalating tensions in the Middle East. US President Donald Trump said the “big wave” of strikes against Iran in the ongoing conflict is still to come.

Marco Rubio stated that the United States (US) is preparing for a “major uptick” in attacks in Iran over the next 24 hours. The United States (US) and Israel hit thousands of targets inside Iran, continuing their joint campaign after they killed its supreme leader, Ayatollah Ali Khamenei.

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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