Canadian Dollar gains ground to near 1.3700 despite Middle East tensions, weak jobs data
- USD/CAD softens to near 1.3710 in Monday’s early Asian session.
- Heightened geopolitical tensions in the Middle East could boost the US Dollar, a safe-haven currency.
- The Canadian economy unexpectedly lost 84,000 jobs in February.
The USD/CAD pair trades in negative territory around 1.3710 during the early Asian trading hours on Monday. Traders will closely monitor the situation in the Middle East. Any further escalation or de-escalation in the Strait of Hormuz will directly impact the US Dollar (USD) against the Canadian Dollar (CAD).
US President Donald Trump said on Monday that he is discussing with other countries about policing the Strait of Hormuz. Trump further stated that Israel is collaborating with the US on securing the vital shipping route.
Other countries, such as the UK, Japan, China, and South Korea, stated that they are still considering their options, but without making commitments after Trump urged them to send warships to secure the Strait of Hormuz. Ongoing conflict in the Middle East could fuel a flight to safe-haven currencies like the Greenback against the CAD in the near term.
Disappointing Canadian employment data could weigh on the Loonie and create a tailwind for the pair. Statistics Canada data showed on Friday that Canada's economy unexpectedly lost a net 83,900 jobs in February, while the unemployment rate rose to 6.7% during the same period.
On the other hand, fears of oil supply disruption could boost crude oil prices and underpin the commodity-linked CAD. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.
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.