Canadian Dollar loses bullish momentum as oil markets ease on cooling Middle East tensions
- The Canadian Dollar briefly tested into a three-day high before losing bullish momentum.
- Loonie markets are falling alongside declining Crude Oil markets.
- Israel-Iran tensions are set to continue easing, dragging down Greenback bids.
The Canadian Dollar (CAD) fumbled its near-term bullish pivot on Tuesday, rising against the Greenback before falling back into familiar levels. The Loonie gained ground after global Crude Oil prices soared on rising Israel-Iran tensions, but a wobbly ceasefire has trimmed barrel bids, pulling the rug from beneath CAD bulls.
Canadian Consumer Price Index (CPI) inflation figures broadly came in as expected on Tuesday. Median market forecasts nailed price growth estimates, resulting in little to no market-moving impact. As the majority of Canadian inflation data continues to come in at or below Bank of Canada (BoC) targets, the back-and-forth over when the BoC will resume cutting rates will likely continue.
Daily digest market movers: Canadian Dollar gives up intraday gains as Crude Oil prices fall
- The Canadian Dollar rose on Tuesday as Loonie bidders tried to extend into a second day of CAD gains, but falling barrel prices trimmed topside momentum.
- Israel and Iran are set to uphold a rickety ceasefire deal brokered by US President Donald Trump, but a back-and-forth exchange of missiles hours after the agreement drew some ire from Trump on Tuesday.
- Canadian CPI inflation in May stuck close to median market forecasts on Tuesday. Annualized BoC core CPI held steady at 2.5% YoY, and headline CPI inflation rose 1.7% YoY as expected.
- The BoC is expected to resume its rate-cutting streak, but the debate about when, and by how much, is still raging on in rate trading markets.
- The only thing left on the Canadian side of the economic data docket this week will be mid-tier Gross Domestic Product (GDP) figures, due on Friday. Canadian GDP growth is expected to clock in at a flat 0.0% MoM in April.
Canadian Dollar price forecast
Despite still closing just inside of bullish territory, the Canadian Dollar is still poised to snap a near-term recovery. The USD/CAD pair has tapped the top end of a descending channel above the 1.3750 region, implying a fresh push down the charts in favor of the Greenback should resume after topside pressure wicks off.
USD/CAD daily chart
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.