CAD Weakens After BoC Rate Hold

The Canadian dollar weakened to 1.37 per USD from the one-month high of 1.36 on April 27th, following the Bank of Canada's decision to hold interest rates. The central bank kept its policy rate at 2.25% and stated that it does not expect the recent surge in energy prices to de-anchor inflation expectations, limiting the view of a potential hike this year. Meanwhile, the US dollar strengthened as markets increased exposure to safe-haven assets on no signs of de-escalation between the US and Iran. The US Federal Reserve is also set to announce its next move on interest rates today with expectations of a hold, mirroring the BoC's cautious approach as it weighs the threat of the Iran war to its economy against the potential for a surge in inflation.

The Canadian dollar strengthened to 1.37 per USD in April, the strongest in one month, amid support from high oil prices and the outlook of a hawkish Bank of Canada. Despite momentary signals of de-escalation between the US and Iran, energy exports from the Persian Gulf remained targeted by Iranian forces and the US Navy seized an Iranian cargo ship, effectively halting tanker flows and trade in the Hormuz chokepoint. The surge in energy prices increased the inflows of foreign exchange into the Canadian financial system as Canada exports a large volume of energy, supporting the loonie. In turn, the resulting upswing in inflation drove the BoC to signal it will combat risks of higher energy prices resulting in entrenched inflation, also supporting the currency. The developments drove the Canadian dollar to outperform other G10 currencies since March as the global economy increased dollar positions due to its safe-haven status.

The Canadian dollar depreciated by 0.3% toward 1.36 against the USD on Friday, as the currency reacted to a sharp 12% dive in oil prices to $82. This drop followed news that the Strait of Hormuz is "completely open" to commercial vessels during a ceasefire between Israel and Lebanon, which has quickly reduced the fear of a global energy crisis. Because Canada is a major oil exporter, the lower prices mean less income for the country, putting pressure on its currency. At the same time, the de-escalation of the conflict has calmed inflation worries, leading investors to bet that the Bank of Canada will cut interest rates sooner than expected. Although the US Dollar Index (DXY) also fell to 97.7, the combination of cheaper oil and the shift toward lower interest rates has tempered the recent demand for the Canadian currency.