Higher Oil prices amid hostilities in Iran lift Canadian Dollar back towards earlier levels

• Having been held just below 1.4000 on Monday, USD/CAD retreats towards 1.3970.
• Oil prices rise as hostilities resume in Iran, lending renewed support to the CAD.
• With the US midterm election results still awaited, US Dollar gains remain constrained.

A modest recovery in crude prices following renewed US hostilities in Iran is helping the Canadian Dollar (CAD) recoup some of its losses against the US Dollar (USD) on Tuesday. After reaching session highs just shy of 1.4000, USD/CAD has slipped towards 1.3970. The pair nevertheless remains within Monday’s trading range and some distance from the seven-week low of 1.3941.

Brent Oil rose about 2.8% to above $106.00 a barrel on Tuesday, with the recovery in crude lending support to the Loonie, given oil’s position as Canada’s leading export. The advance followed reports that the US military had carried out “defensive” strikes on the Iranian island of Qeshm, raising serious questions over the prospects for the latest efforts to restart peace talks.

Oil prices set to stay higher for longer, analysts say

TD Securities’ analysts expect Brent crude to remain in a “higher for longer” pricing regime, with “medium-term fair value for Brent crude oil in the $90-100/bbl region after the eventual conclusion of the conflict in the Middle East.” In TD Securities’ view,  “one to two years of surpluses to rebuild inventories and buffers to required levels.” will be needed by the market. That will sustain elevated oil prices and provide a floor for the commodity-sensitive Canadian Dollar.

Monday’s US ISM Manufacturing Purchasing Managers' Index (PMI) release showed that factory activity picked up more than expected in October. The figures underline the strength of domestic demand, adding weight to the view that the US economy remains exceptional.

Despite those figures, the US Dollar has found little meaningful support, with investors focused on the outcome of Tuesday’s US midterm elections. Polling suggests a Democratic victory in Congress, while the contest for the US Senate remains close.

Tuesday’s main Canadian event is a speech by Bank of Canada (BoC) Governor Tiff Macklem. Having raised interest rates last week and signalled further increases, the BoC has left investors looking for more detail on the timing and extent of its tightening cycle.