Canadian Dollar gains as falling Treasury yields, rising oil weigh on USD/CAD

USD/CAD declines as the US Dollar struggles amid falling US Treasury yields.
Early midterm election results show Democrats leading Republicans in early calls for the US House.
Crude oil rose amid US-Iran diplomatic negotiations and mixed signals regarding potential military action.

USD/CAD depreciates after two days of gains, trading around 1.3970 during Asian hours on Wednesday. The USD/CAD pair is losing ground as the US Dollar (USD) weakens and Treasury yields fall across the curve. US 2-year Treasury yields dropped five basis points to 4.566%, while benchmark 10-year yields fell six basis points to 4.90%.

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

US citizens vote in midterm elections, serving as a key verdict on President Donald Trump's second term. As polls close in early states, live data from Decision Desk HQ shows results called in 201 of the 435 U.S. House seats, with Democrats securing 124 seats and Republicans 77.

Adding to the USD/CAD pair's decline, the commodity-linked Canadian Dollar (CAD) is gaining support from rising crude oil prices, which have advanced as investors evaluate ongoing peace negotiations between the US and Iran. Qatar’s Foreign Ministry spokesperson confirmed that both nations are assessing new proposals from mediators to bridge differences, though Iran’s national security chief stated on social media that Washington’s response remains unsatisfactory.

Meanwhile, Donald Trump stated that the US has no immediate plan to strike Iran and appears to be achieving its objectives, according to the Financial Times. He noted that while the US stands ready to act if necessary, an attack may not be required, despite Israeli Prime Minister Benjamin Netanyahu hinting at possible military action later this week.

CAD focus shifts to US midterms as domestic data thins

Analysts at Scotiabank point out that the domestic data calendar offers few catalysts in the near term, noting that "the domestic release calendar is limited ahead of Wednesday’s trade data, and near-term risk will center on the US midterms and their impact on the broader tone." This leaves broader market sentiment around the US political backdrop as the key driver for the Canadian Dollar in the coming sessions.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.