USD/CAD Stalls as Geopolitics Clash With Oil Support

Key Moments

Strait of Hormuz Tensions Support USD, Oil Strength Backs CAD

The USD/CAD pair slipped a few pips from a three-day high reached during the Asian session on Thursday, as traders struggled to extend the recent two-day advance amid conflicting macro drivers. Heightened geopolitical risks surrounding the Strait of Hormuz continued to underpin the safe-haven US Dollar, but strength in Crude Oil prices simultaneously bolstered the commodity-sensitive Canadian Dollar, capping gains in the currency pair.

US President Donald Trump said on Tuesday that he would indefinitely prolong the ceasefire with Iran, just hours before it was due to expire, and confirmed that the US Navy blockade of Iranian ports would remain in place. Iran, by contrast, has demanded the lifting of the US naval blockade as a firm condition for returning to talks. In addition, Iran’s Revolutionary Guard stated that it fired on three vessels and seized two in the Strait of Hormuz. These developments kept geopolitical risk elevated and helped the US Dollar hold on to the appreciation seen over the preceding two sessions, thereby offering support to USD/CAD.

At the same time, enduring signs of friction between the US and Iran pushed Crude Oil prices higher for a third consecutive day. The resulting boost to the Canadian Dollar limited any sustained upside in USD/CAD, as the Loonie typically benefits from rising Oil given Canada’s status as a major exporter.

Policy Divergence Between Fed and BoC Limits Dollar Momentum

Despite the geopolitical backdrop, the US Dollar lacked strong upside conviction. Expectations for a more hawkish US Federal Reserve have been fading, with markets now anticipating the possibility of a rate cut by year-end. In contrast, money markets have been factoring in the chance of a Bank of Canada rate increase in April.

This divergence in policy outlooks between the Fed and the BoC acted as an additional brake on USD/CAD upside. Given these offsetting forces – safe-haven demand for the USD versus Oil-driven and rate-expectation support for the CAD – market participants were seen as cautious about calling a firm near-term bottom in the pair without more decisive follow-through buying.

Data Watch: US Releases in Focus Alongside Oil and Geopolitics

Traders now turn their attention to upcoming US economic releases, including the standard Weekly Initial Jobless Claims figures and flash PMIs scheduled for later in the North American session. These data points could influence demand for the US Dollar and, in tandem with ongoing moves in Oil prices, may provide fresh direction for USD/CAD.

Nevertheless, the primary focus is expected to remain on geopolitical developments, particularly around the US-Iran situation and the Strait of Hormuz. These risks may continue to inject volatility into global financial markets and create notable trading opportunities in the USD/CAD pair.

Key Drivers of the Canadian Dollar

Several core factors influence the performance of the Canadian Dollar (CAD), including interest rate settings by the Bank of Canada, Crude Oil prices, domestic economic conditions, inflation trends, and the country’s Trade Balance. Broader market sentiment – whether investors are favoring risk-on or risk-off positioning – also plays a role, with risk-on environments tending to be more supportive for the CAD. The health of the US economy is another critical input, given the United States is Canada’s largest trading partner.

Monetary Policy and Oil: Structural Influences on CAD

The Bank of Canada exerts a major influence over the Canadian Dollar by setting the target for interest rates at which banks lend to each other, indirectly shaping borrowing costs across the economy. Its primary mandate is to keep inflation within a 1-3% range by raising or lowering interest rates as needed. Higher interest rates tend to favor the CAD. The central bank can also deploy quantitative easing or quantitative tightening to adjust credit conditions, with the former generally negative and the latter generally positive for the currency.

Crude Oil prices are another crucial variable for CAD performance. As petroleum is Canada’s largest export, shifts in Oil prices can quickly impact the currency’s value. Increases in Oil prices often lift the Canadian Dollar, partly via stronger export revenues and a greater likelihood of a supportive Trade Balance. Conversely, declining Oil prices typically weigh on the CAD.

Inflation and Macro Data as Drivers of CAD

In the current environment of relatively open capital flows, higher inflation has often coincided with currency strength when it prompts central banks to raise interest rates. In Canada’s case, an uptick in inflation can lead the Bank of Canada to tighten policy, drawing in foreign capital seeking higher yields and thereby boosting demand for the Canadian Dollar.

Macroeconomic indicators such as GDP, Manufacturing and Services PMIs, employment figures, and consumer sentiment surveys provide ongoing signals about the health of the Canadian economy. Robust data can attract foreign investment and reinforce expectations of tighter monetary policy, both of which tend to support the CAD. Conversely, disappointing data can undermine the currency by dampening growth expectations and potentially reducing the likelihood of higher interest rates.