Canadian Dollar gains as tech earnings and Middle East risk aversion weigh on US Dollar

• Disappointing megacap earnings weigh on the US Dollar, pushing USD/CAD lower.
• As geopolitical tensions in the Middle East intensified, growing risk aversion favoured low-yielding safe-haven currencies rather than the US Dollar.
• With WTI approaching five-week highs after Houthi attacks on Saudi oil infrastructure and ports, the Canadian Dollar strengthens.

Quarterly earnings from several megacap technology companies fell short of expectations, denting investor confidence and deepening doubts over the sustainability of the AI trade. The resulting pressure on the US Dollar (USD) has left USD/CAD trading around 1.4000 during Friday’s Asian session, extending its decline for a seventh consecutive day.

A worsening geopolitical conflict in the Middle East has also increased risk aversion across markets. Safe-haven demand has strengthened on reports that the US and Israel are preparing further military strikes against Iran after the forthcoming midterm elections. Both the Japanese Yen and Swiss Franc have consequently gained support against the US Dollar.

Against this backdrop, Federal Reserve (Fed) officials have shown little inclination to speed up policy tightening. Although Fed Chair Kevin Warsh recently sounded optimistic about the US economy’s underlying strength, he gave no indication of whether further interest rate rises would be necessary. Even with this measured guidance, participants using the CME FedWatch Tool currently assign a 92.8% probability to a rate increase at the forthcoming policy meeting on 27–28 October.

Higher oil prices are supporting the commodity-linked Canadian Dollar (CAD), adding to the downward pressure on USD/CAD. With geopolitical tensions and supply risks mounting in the Middle East, WTI continues to trade close to its highest level in five weeks.

Responsibility for recent attacks on Saudi Arabia’s Red Sea port of Yanbu was claimed by Iran-backed Houthi militants in Yemen. The group also claimed deadly strikes on an oil field and an airport in the world’s largest crude oil exporter.

Further fuelling concern are reports that the US and Israeli militaries have prepared plans for possible renewed strikes against Iran after next month’s midterm elections. Iran’s energy infrastructure is likely to be a key target. In Europe, meanwhile, Ukraine has stepped up attacks on Russian oil refineries against the backdrop of a US-Russia agreement involving diesel supplies.