USD/CAD moves below 1.3700 as Oil prices rise on potential spread of Gaza war to Lebanon

USD/CAD losses ground as the commodity-linked Canadian Dollar receives support from the upside of the crude Oil prices.
Oil prices appreciate due to escalated Cross-border tensions between Israel and Lebanon's Hezbollah.
US GDP Annualized (Q1) is expected to slightly increase by 1.4%, against the previous growth of 1.3%.

Akhtar Faruqui FXStreet

USD/CAD halts its two days of gains, trading around 1.3680 during the European hours on Thursday. The USD/CAD pair struggles as the commodity-linked Canadian Dollar (CAD) receives support from the upside of the crude Oil prices. Noting the fact, Canada is the largest Oil exporter to the United States.

Concerns over the potential spread of the Israel-Hamas war in Gaza to Lebanon have driven up Oil prices. Cross-border tensions between Israel and Lebanon's Hezbollah have been escalating in recent weeks, fueling fears of a conflict that could involve other regional powers, including major Oil producer Iran, according to Reuters.

Headline inflation in Canada rose to 2.9% in May, surpassing estimates that it would drop to a three-year low of 2.6% from April’s 2.7% reading. Additionally, the Bank of Canada’s (BoC) measures of underlying inflation unexpectedly increased to 0.6%, contrary to expectations of staying at 0.2%. This inflation rise is likely to prompt the central bank to proceed cautiously with further rate cuts.

On Friday, Statistics Canada will release the country's GDP (MoM) data, which is expected to show a 0.3% growth for April, compared to the neutral growth observed in March. On the US Dollar's (USD) side, traders await the release of the US GDP Annualized (Q1) due later in the North American session. The report is expected to show a slight increase of 1.4% from the previous growth of 1.3%.

The US Dollar struggles possibly due to traders’ anticipation of Friday’s Core PCE Price Index inflation, projected to decrease year-over-year to 2.6% from the previous 2.8%. This data is seen as the Federal Reserve's (Fed) preferred inflation gauge. Market participants are likely to hope that signs of easing inflation will encourage the Federal Reserve (Fed) to consider rate cuts sooner rather than later.

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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