USD/CAD declines as lower Treasury yields and higher oil prices support Canadian Dollar

Lower US Treasury yields weigh on the US Dollar, pushing USD/CAD down.
Democrats hold an early lead over Republicans in US House seats called in the midterm elections.
US-Iran diplomatic talks and conflicting signals on possible military action accompany a rise in crude oil.

USD/CAD trades near 1.3970 in Wednesday’s Asian session. The pair has turned lower after two days of gains, pressured by a weaker US Dollar (USD) and declining Treasury yields across maturities. The US 2-year Treasury yield slipped five basis points to 4.566%, while the benchmark 10-year yield lost six basis points to 4.90%.

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

201 of the 435 US House seats have been called, according to live data from Decision Desk HQ. Democrats have secured 124 seats and Republicans 77 as polls close in the early states. Voting in the US midterm elections represents a key judgement on President Donald Trump's second term.

Higher crude prices are also supporting the commodity-linked Canadian Dollar (CAD), adding pressure on USD/CAD. Oil has climbed as investors assess continuing peace talks between the US and Iran. According to Qatar’s Foreign Ministry spokesperson, both countries are reviewing fresh proposals from mediators aimed at narrowing their differences. Iran’s national security chief, however, said on social media that Washington’s response remained unsatisfactory.

The Financial Times reported that Donald Trump said the US had no immediate intention of striking Iran and appeared to be meeting its objectives. Although the US remained prepared to act if needed, he indicated that an attack might be unnecessary. His comments came despite Israeli Prime Minister Benjamin Netanyahu signalling possible military action later this week.

CAD looks to US midterms amid sparse domestic releases

With few near-term catalysts on Canada’s domestic data schedule, Scotiabank analysts note 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." Sentiment towards the US political backdrop therefore remains the main influence on the Canadian Dollar over the coming sessions.

Canadian Dollar: Key Questions

Canadian Dollar: Main Market Drivers

Interest rates set by the Bank of Canada (BoC), oil prices, economic conditions, inflation and the trade balance are central to the Canadian Dollar’s (CAD) performance. Oil is Canada’s largest export, while the trade balance measures the difference between the value of its exports and imports. Investor sentiment also matters: a willingness to buy riskier assets, known as risk-on, supports CAD, whereas risk-off describes a preference for safe havens. Economic conditions in the US are another important influence, given its position as Canada’s largest trading partner.

Bank of Canada Decisions and the Canadian Dollar

By setting the interest rate at which banks lend to each other, the Bank of Canada (BoC) shapes borrowing rates throughout the economy and has a substantial influence on the Canadian Dollar. It raises or lowers rates with the primary aim of keeping inflation at 1-3%. Relatively high rates generally support CAD. The BoC can also alter credit conditions through quantitative easing, which is negative for CAD, or quantitative tightening, which is positive for the currency.

Oil Prices and Their Effect on the Canadian Dollar

As Canada’s largest export, petroleum gives oil prices a direct role in determining the Canadian Dollar’s value. An increase in oil prices generally lifts CAD by raising overall demand for the currency; a decline usually has the reverse effect. More expensive oil also tends to increase the likelihood of a trade surplus, providing further support for CAD.

Inflation’s Role in Canadian Dollar Valuations

Inflation was traditionally viewed as detrimental to a currency because it erodes purchasing power. With cross-border capital controls now less restrictive, however, the reverse has been true in modern times. Higher inflation often prompts central banks to raise interest rates, drawing capital from international investors seeking attractive returns. The resulting demand supports the domestic currency, which in Canada is the Canadian Dollar.

Economic Indicators and Canadian Dollar Performance

GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys can all move the Canadian Dollar by signalling the economy’s health. A robust economy supports CAD through increased foreign investment. It may also prompt the Bank of Canada to raise interest rates, strengthening the currency further. Conversely, disappointing economic readings are likely to weigh on CAD.