Seven-week high for Canadian Dollar as markets assess US election results

• US midterm results renew US Dollar selling, lifting the Canadian Dollar.
• Seven-week lows for USD/CAD as Macklem’s hawkish comments underpin the Loonie.
• An above-forecast US ADP employment reading shifts the focus to the ISM Services PMI.

Around 0.50% is the Canadian Dollar’s (CAD) gain against the US Dollar (USD) on Wednesday. Renewed Greenback selling after the US midterm election results has driven USD/CAD to seven-week lows. The pair stands near 1.3933 at the time of writing.

Democratic victories in both the House and Senate have put Congress and the White House under opposing parties’ control, weighing on the Dollar. Near 101.30, the US Dollar Index (DXY) is at its weakest since 30 September. The index measures the Greenback against a basket of six major currencies.

Oil prices also softened on Tuesday. Traders assessed whether a Democratic-controlled Congress might increase pressure on Trump to bring the war with Iran to an end.

For economists at ING, the US midterm result signals a decisive turning point in Washington policy-making. They expect the Democrat-controlled Congress to “stifle President Trump’s domestic agenda in his final two years in power.”

ING sees the shift in power leaving little scope for a fresh fiscal boost, arguing that “spending and tax proposals, as with most domestic legislation, will likely be gridlocked,” under the new balance. The bank nevertheless distinguishes a lack of fresh stimulus from fiscal consolidation. It warns that “while we won’t see any further fiscal expansion, large fiscal deficits and deteriorating debt dynamics will continue.”

Further near-term losses in the US Dollar could nevertheless be constrained by robust US growth and a hawkish outlook for the Federal Reserve (Fed). The Middle East energy shock continues to pose inflation risks, sustaining expectations for additional interest rate increases.

ADP reported an 86K increase in US private-sector employment for October, ahead of the 69K forecast. The September increase was lowered from 90K to 86K.

Due later in the American trading session, October’s ISM Services PMI is the next focus as markets seek further evidence of the US economy’s health.

The Loonie is also drawing support from hawkish comments by Bank of Canada (BoC) Governor Tiff Macklem. Appearing before parliament on Tuesday, he said “further rate hikes may be needed,” while emphasising that heightened uncertainty meant decisions would be made “meeting by meeting”.