Canadian Dollar recovers lost ground as Iran hostilities drive Oil prices higher

USD/CAD retreats towards 1.3970 after Monday’s advance stalled just short of 1.4000.
The CAD receives renewed support as fresh hostilities in Iran push oil prices upwards.
Gains in the US Dollar remain constrained as markets wait for the US midterm election results.

The Canadian Dollar (CAD) is recovering part of its losses against the US Dollar (USD) on Tuesday, supported by a modest rebound in crude prices following the resumption of US hostilities in Iran. After reaching session highs just short of 1.4000, USD/CAD has slipped towards 1.3970. The pair nevertheless remains inside Monday’s trading range and some distance from its seven-week low of 1.3941.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Tuesday’s recovery in crude prices is lending support to the Loonie, given that crude is Canada’s principal export. Brent oil climbed about 2.8% to above $106.00 a barrel on Tuesday after reports that the US military had carried out “defensive” strikes on the Iranian island of Qeshm. The developments raised serious doubts over the prospects for the latest efforts to restart peace negotiations.

Could oil prices stay elevated for longer, as analysts suggest?

For the period ahead, analysts at TD Securities envisage a “higher for longer” pricing regime for Brent crude, with “medium-term fair value for Brent crude oil in the $90-100/bbl region after the eventual conclusion of the conflict in the Middle East.” According to TD Securities, the market will require “one to two years of surpluses to rebuild inventories and buffers to required levels.” That will sustain elevated oil prices and provide a floor for the commodity-sensitive Canadian Dollar.

Stronger-than-expected growth in US factory activity in October was reported in Monday’s US ISM Manufacturing Purchasing Managers' Index (PMI) release. The figures underscore robust domestic demand, lending further weight to the view that the US economy remains exceptional.

Despite those figures, the US Dollar has received little meaningful support, with investors focused on the results of Tuesday’s US midterm elections. Opinion polls indicate a Democrat win in Congress, alongside a closely contested race for the US Senate.

For Canadian markets, Tuesday’s key event is a speech by Bank of Canada (BoC) Governor Tiff Macklem. Following last week’s interest rate hike and the BoC’s indication that further increases lie ahead, investors will look for greater clarity on the timing and extent of its tightening cycle.

Canadian Dollar: Frequently Asked Questions

Which factors matter most for the Canadian Dollar?

Among the main influences on the Canadian Dollar (CAD) are interest rates set by the Bank of Canada (BoC), oil prices, economic health, inflation and the trade balance. Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Market sentiment also matters: investors may favour riskier assets in a risk-on environment or seek safe havens when conditions turn risk-off. Risk-on sentiment generally supports the CAD. Developments in the US economy are another important influence, as the US is Canada’s largest trading partner.

Why do Bank of Canada decisions affect the Canadian Dollar?

By determining the interest rate at which banks can lend to each other, the Bank of Canada (BoC) exerts considerable influence over the Canadian Dollar. That rate, in turn, affects borrowing rates throughout the economy. Keeping inflation within 1-3% is the BoC’s primary objective, pursued by raising or lowering interest rates. Relatively high rates generally favour the CAD. To influence credit conditions, the central bank can also deploy quantitative easing or quantitative tightening; easing is negative for the CAD, while tightening is positive.

Why are oil prices important for the Canadian Dollar?

With petroleum accounting for Canada’s biggest export, changes in oil prices tend to have an immediate bearing on the Canadian Dollar’s value. A rise in oil prices generally lifts the CAD by increasing overall demand for the currency, while a decline usually has the reverse effect. Higher oil prices also make a positive trade balance more likely, providing another source of support for the CAD.

Why can inflation figures move the Canadian Dollar?

Traditionally, inflation was regarded as harmful to a currency because it erodes the value of money. In modern times, however, the easing of cross-border capital controls has meant that the reverse has often been true. Faced with higher inflation, central banks tend to raise interest rates, drawing greater capital inflows from global investors seeking attractive returns on their money. The resulting demand supports the domestic currency, which in Canada is the Canadian Dollar.

What role do economic data releases play in Canadian Dollar movements?

By signalling the economy’s health, macroeconomic releases can influence the Canadian Dollar. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys are among the indicators capable of moving the CAD. Economic strength supports the currency by drawing more foreign investment and potentially prompting the Bank of Canada to raise interest rates. Weak data, by contrast, are likely to weigh on the CAD.