USD/CAD remains flat after posting little gains in the previous session, hovering around 1.3690 during the Asian hours on Wednesday. The pair holds steady as traders remain cautious ahead of policy decisions from both the Federal Reserve (Fed) and the Bank of Canada (BoC) later in the day.
Traders are particularly focused on guidance from Fed Chair Jerome Powell regarding how the recent surge in oil prices may influence the central bank’s policy outlook. Markets widely anticipate that the Federal Reserve will keep its benchmark interest rate unchanged within the 3.50%–3.75% range for March, according to the CME FedWatch Tool. Such a move would mark a second consecutive pause, underscoring a cautious approach amid rising economic and geopolitical uncertainty.
On the Canadian side, Rabobank strategists Molly Schwartz and Christian Lawrence expect the BoC to hold its overnight rate at 2.25% at Wednesday’s meeting and maintain that level through year-end, despite persistent inflation and slowing economic activity. This March policy view aligns with the consensus among Bloomberg-surveyed analysts and is already fully priced in by markets. The conflict involving Iran and elevated oil prices are seen adding inflationary pressure that monetary policy may struggle to counter, while markets tentatively price in the possibility of a rate hike.
USD/CAD may remain supported as the Canadian Dollar (CAD) faces pressure from softer oil prices. West Texas Intermediate (WTI) crude has pared recent gains, trading near $94.00 per barrel at the time of writing.
However, oil prices could find renewed support amid escalating tensions around the Strait of Hormuz. The US military reported targeting Iranian coastal sites near the strait due to threats from anti-ship missiles to global shipping, according to Reuters. Meanwhile, the BBC reported that Israel claimed responsibility for strikes that killed senior Iranian officials, including Ali Larijani and Basij chief Gholamreza Soleimani.
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.
