Canadian Dollar retains gains as softer safe-haven demand weighs on US Dollar

USD/CAD stays under pressure as diplomatic efforts in the Middle East reduce demand for the US Dollar as a safe haven.
Falling oil prices could put considerable pressure on the commodity-linked Canadian Dollar.
The US Dollar could find support from strong US economic readings and elevated expectations of a Fed rate hike.

USD/CAD remains below its previous close despite recovering from a gap-down opening, trading near 1.3970 in Monday’s Asian session. Reduced safe-haven buying is weighing on the US Dollar (USD) as diplomatic efforts to resolve the Middle East conflict continue, although concerns about renewed US military action against Iran persist. For a third consecutive day, Qatari and Iranian officials held talks aimed at securing an agreement to end the war before the US midterm elections.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Losses in USD/CAD are nevertheless limited, with weaker oil prices potentially weighing on the commodity-linked Canadian Dollar. OPEC+ agreed to leave December oil production targets unchanged, retaining required output at September levels, after which crude prices fell. The arrangement sets Saudi Arabia’s allocation at 10.478 million barrels per day (bpd), with Russia’s at 9.949 million bpd and Iraq’s at 4.431 million bpd.

Growing expectations of a Federal Reserve rate hike could, meanwhile, help the US Dollar recover. Recent US macroeconomic releases have pointed to a resilient economy and persistent inflation, strengthening those expectations. Traders now assign roughly a 75% probability to a December rate increase, according to the CME FedWatch Tool.

Attention is also turning to forthcoming releases, notably the US Nonfarm Payrolls (NFP) report and ISM manufacturing and services data. Several Federal Reserve officials are due to speak during the week, with their comments expected to provide additional insight into the central bank’s monetary policy trajectory.

How does stalled inflation progress in US PCE data reshape the Dollar narrative?

Stalled disinflation is becoming an increasingly important influence on the Dollar and interest-rate outlook, according to strategists at Brown Brothers Harriman. They say the latest US September PCE report “confirms that progress on inflation has stalled.” The figures matched consensus expectations, with “headline PCE rose 0.5% m/m vs. +0.3% in August to be up 3.6% y/y vs. 3.4% in August,” while “core PCE was up 0.3% m/m vs. 0.3% in August to be up 3.1% y/y vs. 3.0% in August.” Taken together, the firmer headline and core readings support their assessment that disinflation has lost momentum, reinforcing the stalled-inflation-progress theme shaping the current Dollar and rates narrative.

Canadian Dollar: What should you know?

Which factors shape movements in the Canadian Dollar?

Interest rates set by the Bank of Canada (BoC), oil prices, economic conditions, inflation and the trade balance are among the main influences on the Canadian Dollar (CAD). Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Investor sentiment also matters: an appetite for riskier assets (risk-on) generally supports the CAD, whereas a preference for safe havens is described as risk-off. The strength of the US economy is another important influence, as the US is Canada’s largest trading partner.

Why do Bank of Canada decisions matter for the Canadian Dollar?

By determining the interest rate at which banks lend to each other, the Bank of Canada (BoC) influences borrowing rates across the economy and, in turn, the Canadian Dollar. Its primary objective is to keep inflation within 1-3%, raising or lowering interest rates as needed. Relatively high rates generally favour the CAD. Credit conditions can also be influenced through quantitative easing or tightening: easing tends to weigh on the CAD, while tightening tends to support it.

Why is the Canadian Dollar sensitive to oil prices?

As petroleum is Canada’s largest export, changes in oil prices often have an immediate effect on the Canadian Dollar. Rising oil prices generally lift overall demand for the currency, pushing the CAD higher; falling prices typically have the reverse effect. More expensive oil also increases the likelihood of a positive trade balance, providing another source of support for the CAD.

Why can inflation readings affect the Canadian Dollar’s value?

Higher inflation can support a currency in today’s environment of relaxed cross-border capital controls, reversing the traditional view that inflation is negative because it erodes the value of money. Central banks tend to respond to stronger inflation by raising interest rates. Those higher rates draw capital from international investors seeking attractive returns, increasing demand for the domestic currency, which in Canada is the Canadian Dollar.

What role do economic releases play in Canadian Dollar movements?

The Canadian Dollar can respond to macroeconomic releases because they indicate the economy’s health. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys can all help determine the CAD’s direction. Economic strength generally supports the currency by attracting foreign investment and potentially prompting the Bank of Canada to raise interest rates. Weak data, by contrast, are likely to push the CAD lower.