USD/CAD breaks its four-day winning streak, trading around 1.3990 during Asian hours on Wednesday. The US dollar (USD) is under downward pressure as easing risk aversion weighs on the currency, with the move largely driven by rising expectations of a landmark peace deal between the United States (US) and Iran.
The pace of approaching an agreement has accelerated, with U.S. Vice President J.D. Vance saying on Tuesday that President Donald Trump may issue a tentative agreement to end the war ahead of schedule, following the president’s earlier remarks that a framework had already been signed. At the same time, Iranian Foreign Minister Seyed Abbas Araghchi confirmed that a novel round of negotiations will begin in Switzerland aimed at reaching a final comprehensive peace agreement.
Meanwhile, global market attention is turning to Wednesday’s key policy meeting of the Federal Reserve (Fed). The U.S. central bank is widely expected to maintain a cautious “wait and see” approach, keeping its benchmark interest rate unchanged at a range of 3.50% to 3.75%. Investors and traders will be closely monitoring the post-meeting news conference, seeking key information on how newly appointed Fed Chairman Kevin Warsh intends to guide monetary policy into the era ahead.
However, the negative impact on the USD/CAD pair could be contained as the commodity-linked Canadian dollar (CAD) may face challenges on the back of lower oil prices. It is essential to note that lower oil prices are putting downward pressure on the CAD as Canada is the largest oil exporter.
Oil prices fell as expectations rose for an upcoming peace deal between the United States (US) and Iran that could significantly augment global supply. This Friday, the two countries are scheduled to sign an interim agreement in Switzerland that will provide Tehran with broad economic incentives and enable the immediate resumption of Iranian oil exports. Additionally, international tankers are expected to resume sheltered transit through the strategic Strait of Hormuz once the pact officially enters into force.
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 sheltered 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 employ 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 current 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 store 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 robust 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.
