USD/CAD rebound falters above 1.3600 as Oil prices support the Loonie

USD/CAD eases to 1.3615 after failing at 1.3630 earlier on Tuesday.
The Canadian Dollar is drawing support from high Crude prices.
A moderate aversion to risk amid the rising US-Iran tensions is underpinning the USD.

Guillermo Alcala FXStreet

The US Dollar (USD) shows minor losses against the Canadian Dollar (CAD) on Tuesday, although it remains steady above 1.3600 so far, trading at 1.3515 at the time of writing and holding most of the last two trading days' gains, after bouncing from Friday’s lows at 1.3550.

A moderate risk aversion is providing some support to the safe-haven Greenback this week. The escalating tensions between Washington and Tehran are adding pressure on a frail ceasefire and keeping investors on edge about the resumption of hostilities.

Oil prices remain above the key $100 level

US President Donald Trump’s plan to escort vessels trapped in the Strait of Hormuz has failed to improve the situation. US sources say that two American-flagged cargo ships have crossed the waterway, but some other ships have reported explosions or fires, and Iran has attacked an Oil port in the United Arab Emirates (UAE), which hosts a large US Army base.

Earlier on Tuesday, Iran's Parliament Speaker Mohammad Bagher Ghalibaf affirmed that a “new equation” has solidified in the Strait of Hormuz and has blamed the US and its allies for jeopardising energy transit by violating the ceasefire and imposing a blockade.

The rising tensions are buoying Oil prices, with the US benchmark West Texas Intermediate (WTI) barrel steady above $101. Crude Oil is Canada’s main export, and these prices are providing support to the CAD.

On the macroeconomic front, the US ISM Services Purchasing Managers Index (PMI) for April and the US JOLTS Job Openings report from March will be the main events on Tuesday. The highlight of the week, however, will be on Friday with the US Nonfarm Payrolls report and Canada’s Employment figures for April coming out simultaneously.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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