- USD/CAD avoids the worst excesses of volatility in markets from the reported retaliation of Israel against Iran.
- The flight to safety boosted the US Dollar but the Canadian Dollar benefited equally from surging Oil prices.
- Interest rate differentials remain a bullish factor for the pair as the Fed delays expected interest rate cuts.
USD/CAD is trading in the 1.3750s after edging lower on Friday. The pair has been shielded by the worst excesses of volatility witnessed in markets brought on by the escalating geopolitical situation in the Middle East.
The surge in risk aversion after reports of Israel’s retaliatory attacks on Iran have supported the safe-haven US Dollar (USD) along with the other usual suspects: Gold, JPY, CHF.
Yet the impact on USD/CAD was muted due to the Middle East conflict’s impact on Oil, and the Canadian Dollar’s sensitivity to Oil prices.
WTI Crude Oil prices rose over 4.0% from $81.80 to $85.50 following the news of Israel’s purported attack on Iran. This strengthened CAD because Oil is the country’s primary export.
Beyond the Israeli-Iran conflict, however, other factors are also expected to drive up the price of Oil, according to some analysts.
One factor is the US’s increasingly long list of Oil producing countries who are potential targets for sanctions.
“Less Oil from Iran and Venezuela is likely to reach the market in the coming months, as the US intends to tighten Oil sanctions against Iran and reinstate the Oil sanctions against Venezuela that have been eased in the meantime,” says Commerzbank in a recent note.
Commerzbank sees other bullish factors for Crude in the form of continued OPEC supply constraints and increased broad demand for gasoline due to the likelihood that the European Central Bank (ECB) and Federal Reserve (Fed) will start cutting interest rates before the end of the year.
From the perspective of Oil, the outlook favors the CAD side of the USD/CAD pair, and is therefore a bearish factor for USD/CAD.
