Rebounding oil prices lift Canadian Dollar and weigh on USD/CAD

USD/CAD trades lower as a crude oil rebound towards $95.80 per barrel supports the commodity-linked Canadian Dollar against the US Dollar.
Immediate geopolitical concerns in energy markets ease somewhat as US-Iran diplomatic talks continue alongside Qatari mediation.
Broader USD downside remains cushioned by demand for safe-haven assets and uncertainty surrounding the US midterm elections.

Support for the Canadian Dollar (CAD) from a modest crude oil recovery is weighing on USD/CAD, which trades near 1.3990 during Tuesday’s Asian session after edging higher the previous day. The pair has slipped slightly as oil regains some ground. Canada’s position as the largest crude oil exporter to the United States (US) leaves its currency closely linked to energy markets. Following a sharp fall of nearly 7% in the preceding session, West Texas Intermediate (WTI) crude is trading around $95.80 per barrel.

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

Geopolitical developments, however, continue to restrict the scope for oil gains. Iran has confirmed that indirect talks with the United States to resolve their eight-month conflict are continuing, potentially adding to pressure on crude prices. Several days of discussions between Iranian officials and Qatari mediators preceded these talks, producing revised proposals but no major breakthrough.

According to Iranian Foreign Minister Abbas Araqchi, intensive consultations are continuing. He said Iran had presented its conditions and that further progress now hinged on Washington’s political decisions. US President Donald Trump, meanwhile, had earlier signalled that he would hold off on military action against Iran until after the midterm elections.

The wider economic backdrop is also being shaped by US political developments. With American voters going to the polls for the midterm elections, high energy prices are putting the Trump administration and the Republican Party under increasing pressure. Polls currently favour a Democratic victory in the House of Representatives, although the race for control of the Senate remains tight.

Election uncertainty is supporting the safe-haven US Dollar, which may restrict further declines in USD/CAD despite the Canadian Dollar’s current support. The midterms have prompted concerns that attention could shift back towards inflation and deficit issues. Interest rate expectations have consequently moved slightly: the CME FedWatch Tool now indicates roughly a 73% probability of a US Federal Reserve rate hike in December, compared with 80% a week ago.

How are Fed patience and AI growth concerns weighing on the Dollar and yields?

In their assessment of last week’s moves, Brown Brothers Harriman strategists say the Dollar and short-term Treasury yields “drifted lower last week as Fed Chair Kevin Warch struck a patient tone despite stalled progress on US inflation.” Explaining the additional pressure, they note that “concerns about an AI investment slowdown compounded the move, casting doubt on the US growth outlook and dampening Fed rate hike expectations.”

US Dollar: frequently asked questions

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also serves as the ‘de facto’ currency in a significant number of other countries, circulating alongside their local banknotes. No currency is traded more widely: according to 2022 data, it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The USD replaced the British Pound as the world’s reserve currency after the Second World War. Gold provided backing for the US Dollar through most of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

Why do Federal Reserve decisions affect the US Dollar?

Monetary policy, set by the Federal Reserve (Fed), is the single biggest influence on the US Dollar’s value. The Fed’s dual mandate is to maintain price stability by controlling inflation and to promote full employment. Adjustments to interest rates are its main means of meeting these objectives. If prices increase too rapidly and inflation exceeds the Fed’s 2% target, the central bank raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high unemployment rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

How does quantitative easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve may print additional Dollars and introduce quantitative easing (QE). Through QE, the Fed sharply expands the supply of credit within a stalled financial system. This unconventional policy is deployed when credit has dried up because banks, fearing counterparty defaults, are unwilling to lend to one another. It serves as a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, QE was the Fed’s preferred response to the credit crunch. The process entails printing more Dollars to purchase US government bonds, mainly from financial institutions. Typically, QE weakens the US Dollar.

How does quantitative tightening work, and what does it mean for the US Dollar?

Reversing the process, quantitative tightening (QT) involves the Federal Reserve halting bond purchases from financial institutions. It also stops reinvesting the principal repaid on maturing bonds in its holdings into new purchases. This generally supports the US Dollar.