USD/CAD trims gains from the prior session, trading near 1.3720 during Asian hours on Thursday. The pair weakens as the commodity-linked Canadian Dollar (CAD) strengthens, supported by rebounding oil prices after fresh attacks on key Middle East energy infrastructure heightened concerns over disruptions to global oil and gas supplies.
Iran launched missile strikes on a Qatari site hosting the world’s largest LNG export facility, part of a broader escalation following an Israeli attack on Iran’s South Pars gas field. US President Donald Trump said he was aware of the Israeli strike in advance but urged restraint against further attacks on Iranian energy assets.
The Bank of Canada (BoC) kept its policy rate unchanged at 2.25% on Wednesday, in line with expectations. However, its statement reflected a more cautious outlook, citing weaker growth prospects and the risk of rising inflation. Policymakers noted that recent data showed economic activity falling short of expectations, with risks increasingly tilted toward slower growth. They also warned that higher gasoline prices and ongoing Middle East tensions could push inflation higher in the near term.
In his press conference, Governor Tiff Macklem emphasized that the economic impact of the Iran conflict will depend on its duration, adding that policy decisions will be made on a meeting-by-meeting basis. Macklem also noted that a prolonged conflict could alter the composition of economic growth.
Meanwhile, the Federal Reserve (Fed) held rates steady at 3.50%–3.75% at its March meeting. Fed Chair Jerome Powell indicated that while inflation is expected to ease gradually, progress may be slower than previously anticipated, with rising oil prices linked to the Iran conflict likely to lift inflation in the near term.
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.
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.
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.
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.
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.
