The Canadian Dollar (CAD) weakened on Tuesday as Oil prices slid sharply amid renewed hopes for a US-Iran deal that could reopen the Strait of Hormuz and normalize regional tensions. US Treasury Secretary Scott Bessent stated, “We are in talks with the Iranians. There is a chance we may have a deal today or tomorrow to open the strait of Hormuz and move towards a more normalized position in this conflict” [1]. This development pressured Oil prices, with West Texas Intermediate (WTI) trading around $75.50, down nearly 4% on the day and at its lowest level since July 13 [1].
The decline in Oil prices weighed heavily on the commodity-linked Canadian Dollar, causing USD/CAD to reverse earlier losses and reach a fresh weekly high around 1.4068 at the time of writing [1]. The Loonie is particularly sensitive to Oil price movements due to Canada’s status as a major Oil exporter [1].
Lower Oil prices also eased energy-driven inflation pressures, reducing the perceived need for central banks to maintain restrictive monetary policy or consider further interest rate hikes. For the Federal Reserve, the probability of a September rate hike fell to 58.9% from 67.2% a day earlier, according to the CME FedWatch Tool [1]. Chicago Fed President Anna Paulson commented, “We need a mildly restrictive monetary policy, and the Fed likely has that now,” but emphasized that “inflation is too high; we want to bring it down” [1].
Similarly, the Bank of Canada (BoC) could see less pressure to raise rates, as the central bank had previously warned that persistently high energy costs might require consecutive rate hikes [1]. Market participants are now awaiting key labor market data from both the US and Canada later in the week, including US JOLTS Job Openings, ADP Employment Change, US Nonfarm Payrolls, and Canadian employment figures [1].
On the day, the Canadian Dollar was the strongest against the Japanese Yen but weakened against most other major currencies, including a 0.15% decline versus the US Dollar [1].
CONCLUSION
The Canadian Dollar’s decline was driven by a sharp drop in Oil prices following US-Iran deal hopes, which also reduced expectations for further rate hikes by the Fed and BoC. Market focus now shifts to upcoming labor market data for further direction. The overall sentiment for the CAD remains negative in the short term due to commodity price pressures.