USD/CAD edges higher as US-Iran tensions underpin the US Dollar
- USD/CAD edges higher as escalating Strait of Hormuz tensions support the US Dollar.
- Rising Oil prices support the Loonie, but gains lag against the USD.
- Markets eye US and Canadian employment data this week.
USD/CAD edges higher on Monday as rising tensions in the Strait of Hormuz, amid the ongoing US–Iran standoff, support the US Dollar (USD). At the time of writing, the pair is trading around 1.3617, up nearly 0.22% on the day.
US-Iran tensions show no signs of de-escalation. Iran’s Fars news agency reported that two missiles struck a US naval vessel near the island of Jask after it allegedly ignored warnings from the Islamic Revolutionary Guard Corps (IRGC) to halt. However, a US official denied that any American vessel had been hit, according to Axios.
The development follows US President Donald Trump’s announcement of a naval initiative dubbed “Project Freedom,” aimed at escorting stranded commercial vessels through the Strait of Hormuz. In response, Tehran warned it would attack US forces if they attempted to approach or enter the waterway.
Over the weekend, Washington rejected Iran’s revised 14-point proposal and presented a counteroffer, now under review in Tehran, with nuclear disagreements still unresolved. US President Donald Trump said in an interview with Israel’s Kan News, “It’s not acceptable to me. I’ve studied it, I’ve studied everything — it’s not acceptable.”
Persistent geopolitical tensions are underpinning the US Dollar (USD) after its recent weakness. At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.28, extending Friday’s rebound from near two-week lows.
For the Canadian Dollar (CAD), ongoing supply disruptions in the Strait of Hormuz and the resulting surge in Oil prices are supporting the commodity-linked Loonie against its major peers, given Canada’s role as a major crude exporter. Still, the Loonie lags the US Dollar, which continues to draw support from its status as a global reserve currency.
Meanwhile, rising Oil-driven inflation risks are also fueling hawkish expectations for both the Federal Reserve (Fed) and the Bank of Canada (BoC). Higher energy costs have already pushed inflation higher in recent data. Attention now turns to the upcoming employment reports from both the US and Canada, due on Friday, which could provide further direction for monetary policy expectations and the USD/CAD pair.
Canadian Dollar FAQs
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.