Canadian Dollar holds steady amid a continued recovery in oil prices

USD/CAD remains largely unchanged, with a rebound in WTI prices boosting Canada’s export earnings.
The safe-haven dollar remains under pressure as Democratic election wins fuel expectations of political gridlock and hopes for diplomacy with Iran.
The Fed's December rate outlook remains in focus as traders await crucial US jobs data.

USD/CAD is largely steady near 1.4010 in Friday’s Asian session, following a modest advance the previous day. Support for the commodity-linked Canadian Dollar (CAD) from firmer oil prices could push the pair lower. Canada is among the world’s biggest oil producers and a major supplier to the United States (US), leaving it directly exposed to gains in crude markets. Rising oil prices typically bolster the CAD through stronger export earnings and improved terms of trade; a decline in prices, by contrast, generally weighs on the currency.

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

A recovery in West Texas Intermediate (WTI) crude has gathered momentum as traders weigh the return of Middle Eastern supplies against the geopolitical implications of the US midterm elections. Following Wednesday’s sell-off, crude extended its rebound, partly on the back of the Democrats winning both the House and the Senate. The change in the political landscape fuelled speculation that US President Donald Trump could come under greater pressure to bring the eight-month conflict with Iran to an end. A rapid resolution is far from assured, however, as market participants reassess whether the election results will actually bring a swift end to the war.

Broader caution before important economic releases is providing support to the US Dollar (USD), helping USD/CAD hold steady. Attention is centred on the forthcoming US Nonfarm Payrolls (NFP) report, which is expected to be crucial in determining market expectations for the Federal Reserve’s December policy decision.

Weighing against this support for the dollar are the recent fall in US bond yields and continued hopes of diplomatic headway with Iran, both of which are keeping the safe-haven currency under pressure. The Democrats’ election victory has also increased expectations of a political impasse in Washington. Such gridlock could curb government expenditure and, in turn, slow economic growth.

OCBC strategists advise against attaching too much significance to the Dollar’s post-election decline, saying they “would be cautious about extrapolating the initial USD sell-off into a sustained decline.” In their view, Democratic control of Congress “does not mean unrestricted policy power,” as “major legislation” remains “vulnerable to President Trump's veto.” The strategists also point out that Democrats “lack the two-thirds majorities in both chambers needed to override it,” leaving limited room for far-reaching policy changes. This, in turn, constrains the argument for a structurally weaker USD at this stage.

Canadian Dollar: Frequently Asked Questions

Which factors shape movements in the Canadian Dollar?

Interest rates set by the Bank of Canada (BoC), oil prices, economic conditions, inflation and the trade balance are the principal 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. Investor sentiment matters too: an appetite for riskier assets, known as risk-on, supports the CAD, whereas risk-off conditions involve a shift towards safe-haven assets. Economic conditions in the US also have a major bearing on the Canadian Dollar, given that the US is Canada’s largest trading partner.

Why do Bank of Canada decisions matter for the Canadian Dollar?

By setting the interest rate at which banks lend to each other, the Bank of Canada (BoC) influences borrowing rates across the economy and has a substantial impact on the Canadian Dollar. Its primary objective is to keep inflation within 1-3%, raising or lowering interest rates as needed. Relatively high rates generally support the CAD. The Bank of Canada also has quantitative easing and quantitative tightening at its disposal to shape credit conditions: easing weighs on the CAD, while tightening supports it.

Why is the Canadian Dollar sensitive to oil prices?

As petroleum is Canada’s largest export, changes in oil prices tend to feed directly into the Canadian Dollar’s value, making oil a major driver of the currency. An increase in oil prices generally lifts the CAD by raising overall demand for it; falling oil prices usually have the reverse effect. A rise in oil prices also makes a trade surplus more likely, providing further support to the CAD.

Why can inflation figures move the Canadian Dollar?

Inflation was traditionally regarded as a drag on a currency because it erodes the value of money. In modern times, however, the easing of restrictions on cross-border capital flows has produced the opposite effect. When inflation rises, central banks tend to increase interest rates, drawing more capital from international investors seeking attractive returns. Demand for the domestic currency consequently rises, which in Canada means greater demand for the Canadian Dollar.

What do economic releases mean for the Canadian Dollar?

By indicating the state of the economy, macroeconomic releases can move the Canadian Dollar. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys are among the indicators that can determine the CAD’s direction. Economic strength supports the currency by drawing in more overseas investment and potentially prompting the Bank of Canada to raise interest rates. Weak economic readings, on the other hand, are likely to push the CAD lower.