The USD/CAD pair declines to around 1.3835 during the early Asian trading hours on Wednesday. The US Dollar (USD) weakens against the Canadian Dollar (CAD) after Iran agrees to a two-week ceasefire with the United States (US).
An Iranian official said late Tuesday that it has accepted a two-week ceasefire, with negotiations to begin on Friday in Pakistan’s Islamabad. This action came after US President Donald Trump stated that he would suspend attacks, subject to Tehran agreeing to fully reopen the Strait of Hormuz.
Iran’s Foreign Minister Abbas Araghchi said safe passage through the key waterway will be possible for a period of two weeks via coordination with Iranian armed forces. The Greenback attracts some sellers following these headlines.
Traders await the release of the Federal Open Market Committee (FOMC) Minutes later on Wednesday. The report could offer some insights into how officials view the recent energy shock caused by conflicts in the Middle East. Any hawkish remarks from Federal Reserve (Fed) officials could help limit the USD’s losses in the near term.
Meanwhile, crude oil prices plunge below $100 as Iran agrees to allow safe passage through the Strait of Hormuz during the ceasefire. This could weigh on the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and lower crude oil prices generally have a negative impact on the CAD.
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.
