Canadian Dollar flatlines as traders watch possible US-Iran deal
- USD/CAD trades flat near 1.4015 in Thursday’s early European session.
- Tehran and Oman agreed on route coordinates in the Strait of Hormuz.
- Fed’s Schmid said he favored tighter Fed policy to bring down inflation.
The USD/CAD pair USD/CAD holds steady around 1.4015 during the early European trading hours on Thursday. Traders await a possible US-Iran deal, which could give direction to the pair. The US Initial Jobless Claims report is due later on Thursday.
CNN reported on Wednesday that Iran’s Deputy Foreign Minister, Kazem Gharibabadi, said that Iran and Oman are close to finalizing a proposed framework for commercial shipping through the Strait of Hormuz. However, it still wouldn’t automatically reopen the critical waterway. Early Wednesday, US President Donald Trump stated that he had very productive talks with Iran.
Traders will closely monitor the developments surrounding US-Iran deals. Any signs of renewed tensions between the two countries could boost the commodity-linked Canadian Dollar (CAD) against the US Dollar (USD). It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
Hawkish remarks from Federal Reserve (Fed) policymakers could underpin the Greenback in the near term. Kansas City Fed President Jeff Schmid said on Wednesday that tighter monetary policy may be required to bring inflation back to the central bank's 2% target.
Canada trade surplus extends as gold offsets energy weakness
Economists at Royal Bank of Canada highlight that "Canada's trade balance held in surplus for a fourth consecutive month in June," with a notable "jump in gold exports offsetting a (price-related) drop in energy exports." They point out that this composition underscores the role of precious metals in supporting the external position at a time when lower energy prices are weighing on export values.
Schmid flags AI-driven inflation risks and backs tighter Fed stance
Fed’s Schmid delivers a moderately hawkish message, with a 7.3/10 FXS Speechtracker score slightly above the 7/10 historical average, emphasizing that current policy is “not tight” and that tighter monetary policy is needed to return inflation to the 2% target. The focus on AI investment as a new inflation driver, the warning that recent energy cost relief may be temporary, and the insistence that inflation remains “too high” and “worrisome” despite resilient growth and a roughly balanced labor market underscore a bias toward further restraint, even if price pressures stem from supply shocks and are assessed primarily through the PCE gauge.
The FXS Fed Sentiment Index slipped by 0.96 points to 145.80, signaling a modest pullback in perceived hawkishness relative to the established baseline. However, with the FXS Fed Sentiment Index still well above the neutral 100 mark, Schmid’s remarks keep the Fed firmly in hawkish territory despite the slight softening in tone captured by the FXS Speechtracker.
Technical Analysis: USD/CAD keeps a bullish vibe above the 100-day SMA
In the daily chart, USD/CAD holds a constructive near-term bias as spot remains above the 100-day simple moving average (SMA) and the lower Bollinger Band, suggesting underlying demand on dips despite the recent pullback from the upper band. The Relative Strength Index (14) at 41.37 has retreated from overbought territory into the lower mid-range, hinting at cooling bullish momentum but not yet signaling a decisive bearish shift while price is supported by these underlying averages.
On the topside, initial resistance aligns with the Bollinger middle band near 1.4070, followed by the upper Bollinger Band around 1.4155, where recent advances have stalled. On the downside, immediate support is seen at the day’s open region around 1.4015, ahead of the lower Bollinger Band at 1.3980; a deeper slide would expose the more significant floor at the 100-day SMA around 1.3912, where buyers are likely to defend the broader uptrend.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.
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