The USD/CAD pair remains stable around 1.3670 during Thursday’s early European session. The situation is stabilizing for the pair as traders wait for signs of diplomatic progress that will end the war in the Middle East.
The United States extends ceasefire with Iran at Pakistan’s request, while US President Donald Trump waits for a unified Iranian proposal. Nevertheless, tensions remain high in the Middle East as Tehran holds tight to the Strait of Hormuz, controlling passage through the trade route and shelling ships.
Iran’s chief negotiator and speaker of parliament, Mohammad Bagher Ghalibaf, said Israel’s warmongering and “gross” ceasefire violations made reopening the Strait of Hormuz “impossible.” Rising oil prices, driven by the risk of conflict in the Middle East, are lifting the commodity-linked Loonie. It is worth noting that Canada is a major oil exporting country, and high oil prices generally have a positive impact on the Canadian dollar (CAD).
The most significant event will be the preliminary reading of the S&P Global US Purchasing Managers Index (PMI). The manufacturing PMI is expected to improve slightly in April to 52.5 from 52.3 in the previous reading. The services PMI is forecast to rise to 50.0 in April, up from 49.8 previously. If reports show a better-than-expected result, it could strengthen the dollar against the CAD in the near future.
Canadian Dollar FAQs
The key factors shaping the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of crude oil, which is Canada’s largest export, the condition of its economy, inflation and the trade balance, i.e. the difference between the value of Canadian exports and imports. Other factors include market sentiment – whether investors are taking on riskier assets (with risk) or looking for unthreatening havens (with risk), with risk being positive relative to CAD. As the United States’ largest trading partner, the health of the U.S. economy is also a key factor influencing the exchange rate of the Canadian dollar.
The Bank of Canada (BoC) has significant influence over the Canadian dollar by setting the interest rates that banks can lend to each other. This affects the level of interest rates for everyone. The main goal of the BoC is to keep inflation at 1-3% by raising or lowering interest rates. Relatively higher interest rates tend to benefit CAD. The Bank of Canada may also exploit quantitative easing and tightening to influence lending terms, with the former being CAD negative and the latter CAD positive.
The price of oil is a key factor influencing the value of the Canadian dollar. Oil is Canada’s largest export, so the price of oil usually has a direct impact on the value of CAD. Generally speaking, if the price of oil increases, CAD also increases because aggregate demand for the currency increases. The opposite is true when the price of oil falls. Higher oil prices also tend to result in a greater likelihood of a positive trade balance, which also supports CAD.
While inflation has always traditionally been considered a negative factor for currency because it reduces the value of money, in contemporary times the opposite has been true with the relaxation of cross-border capital controls. Higher inflation prompts central banks to raise interest rates, which attracts more capital inflows from global investors looking for a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian dollar.
Macroeconomic data releases are used to assess the condition of the economy and may affect the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can influence the direction of CAD. A forceful economy is good for the Canadian dollar. Not only will it attract more foreign investment, but it could encourage the Bank of Canada to raise interest rates, leading to a stronger currency. However, if economic data is frail, CAD will likely decline.
