Canadian dollar strengthens as risk appetite lifts on truce

Key Moments

USD/CAD trades near 1.3830, marking a third consecutive session of losses for the pair as safe-haven demand for the US Dollar eases.
WTI crude hovers around $89.80 per barrel, down more than 11% as supply concerns recede following the US-Iran two-week ceasefire agreement.
Canada’s Ivey PMI drops to 49.7 in March from 56.6, signaling contraction and missing the 55.9 consensus forecast.

USD/CAD Pressured as Safe-Haven Flows Recede

USD/CAD extends its decline for a third straight session, trading around 1.3830 during Asian hours on Wednesday. The pair remains under pressure as the US Dollar (USD) weakens amid reduced safe-haven flows after the United States and Iran agreed to a two-week ceasefire.

Improved risk sentiment has weighed on the USD, but the downside in USD/CAD may be limited. The Canadian Dollar (CAD), which is closely tied to commodity prices, could face headwinds from lower crude prices following the de-escalation in geopolitical tensions.

Oil Retreats as Supply Fears Ease

West Texas Intermediate (WTI) crude trades near $89.80 per barrel, down more than 11% at the time of writing. The pullback in oil prices reflects easing supply concerns after US President Donald Trump accepted a two-week ceasefire with Iran, contingent on Tehran reopening the strategically important Strait of Hormuz.

Trump said the US received a 10-point proposal from Iran, describing it as a “workable basis for negotiations,” with a two-week window to finalize a deal. According to the report, Iran agreed to reopen the key waterway for two weeks if all attacks cease, and Israel has reportedly accepted the truce.

While reduced geopolitical risk supports broader market sentiment, softer oil prices could weigh on the CAD, especially given that Canada is the largest crude exporter to the United States.

Macro Data: Weak Canadian PMI vs. Steady US Labor Momentum

On the data front, Canada’s seasonally adjusted Ivey Purchasing Managers’ Index (PMI) fell to 49.7 in March from 56.6 previously, coming in below the 55.9 forecast. The drop below the 50 threshold points to a contraction in business activity.

In contrast, US labor market indicators show ongoing resilience. The US ADP Employment Change four-week average increased by 26,000 jobs from 15,250 previously, marking a third consecutive week of hiring gains.

Indicator	Region	Latest Reading	Previous	Forecast	Interpretation
Ivey PMI (seasonally adjusted, March)	Canada	49.7	56.6	55.9	Signals contraction in activity
ADP Employment Change (4-week average)	United States	26,000	15,250	Not stated	Third straight week of hiring gains
WTI crude price	Global	$89.80 per barrel	Not stated	Not stated	Down over 11% as supply fears ease

Canadian Dollar: Core Drivers and Market Dynamics

The Canadian Dollar is influenced by several primary factors, including interest rate settings by the Bank of Canada (BoC), oil prices, domestic economic performance, inflation trends, and the trade balance, which reflects the gap between exports and imports. Broader market sentiment also plays a role: risk-on environments tend to support the CAD, while risk-off sentiment typically benefits safe-haven currencies at the expense of the Canadian Dollar. Given Canada’s close trade ties with the United States, the health of the US economy is another key driver.

Role of the Bank of Canada and Oil Prices

The BoC affects the CAD mainly through its policy rate, which guides the cost of borrowing across the economy. The central bank aims to keep inflation within a 1-3% range by adjusting interest rates higher or lower. Relatively higher interest rates are generally supportive of the CAD. The BoC can also employ quantitative easing or tightening to shape financial conditions, with asset purchases typically seen as negative for the currency and balance sheet reduction as supportive.

Oil prices are particularly important for the CAD, as petroleum is Canada’s most significant export. Changes in crude prices often transmit quickly to the currency: rising oil prices tend to lift the CAD by increasing demand for Canadian exports and improving the trade balance, while falling prices usually have the opposite effect.

Impact of Inflation and Economic Data on the CAD

In recent times, higher inflation has often been associated with expectations of tighter monetary policy, which can draw in foreign capital seeking higher yields. For Canada, elevated inflation can prompt the BoC to raise interest rates, in turn boosting demand for the CAD.

Macroeconomic indicators such as GDP, manufacturing and services PMIs, employment figures, and consumer confidence surveys all help shape expectations for growth and policy. Strong data tend to be positive for the Canadian Dollar, as they can attract foreign investment and increase the likelihood of higher interest rates. Conversely, weaker readings, such as the latest Ivey PMI at 49.7, can weigh on the currency.