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.
Lower-yielding safe-haven currencies outperformed the US Dollar as intensifying Middle East tensions fuelled risk aversion.
Near five-week highs in WTI support Canadian Dollar gains after Houthi attacks on Saudi oil infrastructure and ports.

1.4000 is the approximate level for USD/CAD in Friday’s Asian trading. The pair is falling for a seventh consecutive day as growing doubts over the sustainability of the AI trade weigh on the US Dollar (USD). Quarterly earnings from several megacap technology companies missed expectations, eroding investor confidence.

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Broader risk aversion has also intensified as geopolitical conflict escalates in the Middle East. Safe-haven demand has increased on reports that the US and Israel are preparing further military strikes against Iran after the upcoming midterm elections. Both the Japanese Yen and Swiss Franc have strengthened against the Greenback as a result.

A 92.8% probability of a rate increase at the upcoming 27–28 October policy meeting is currently priced in by market participants using the CME FedWatch Tool. That pricing contrasts with Federal Reserve (Fed) officials’ limited urgency to step up policy tightening. Fed Chair Kevin Warsh recently voiced optimism about the US economy’s underlying strength, without indicating whether further interest rate increases would be necessary.

Higher oil prices are supporting the commodity-linked Canadian Dollar (CAD), adding to downward pressure on USD/CAD. With geopolitical tensions and supply risks in the Middle East intensifying, 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 concerns stem from reports that the US and Israeli militaries have prepared plans for possible renewed strikes against Iran following next month’s midterm elections. Iran’s energy infrastructure is likely to be a principal target. In Europe, Ukraine has stepped up attacks on Russian oil refineries amid a US-Russia agreement concerning diesel supplies.

Canadian Dollar: Key Questions Answered

Canadian Dollar: Main Drivers

Interest rates set by the Bank of Canada (BoC), oil prices, economic health, inflation and the trade balance are the main drivers of 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. Market sentiment also matters: investors may favour riskier assets in a risk-on environment or seek safe havens in a risk-off environment. Risk-on sentiment supports the CAD. Conditions in the US economy are another major influence, given that the US is Canada’s largest trading partner.

Bank of Canada Policy and the Canadian Dollar

By setting the interest rate at which banks can lend to each other, the Bank of Canada (BoC) exerts substantial influence over the Canadian Dollar. That rate feeds through to borrowing rates across the economy. Keeping inflation within 1-3% is the BoC’s primary objective, pursued by raising or lowering interest rates. Relatively high rates generally support the CAD. Credit conditions can also be influenced through quantitative easing, which is negative for the CAD, or quantitative tightening, which is positive for the currency.

Oil Prices and Canadian Dollar Demand

As Canada’s biggest export, petroleum gives oil prices a significant and often immediate influence on the Canadian Dollar’s value. Rising oil prices generally lift overall demand for the currency, pushing the CAD higher; falling prices tend to have the reverse effect. More expensive oil also increases the likelihood of a trade surplus, providing further support for the CAD.

Inflation and the Canadian Dollar

The relaxation of cross-border capital controls has reversed the traditional view of inflation as a negative for currencies because it erodes the value of money. In modern markets, higher inflation typically prompts central banks to raise interest rates. Those higher rates attract capital from global investors seeking attractive returns, increasing demand for the domestic currency, which in Canada is the Canadian Dollar.

Economic Indicators and Canadian Dollar Direction

By signalling the economy’s health, macroeconomic releases can move the Canadian Dollar. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys all help shape the CAD’s direction. Economic strength supports the currency by attracting foreign investment and potentially encouraging the Bank of Canada to raise interest rates. Weak economic readings, by contrast, are likely to push the CAD lower.