Canadian Dollar advances as Democratic election sweep weighs on US Dollar

• A Democratic sweep in the midterm elections raised fears of political deadlock, weighing on the US Dollar.
• Recent US economic figures underpin the Federal Reserve’s hawkish position, limiting potential losses for the Greenback.
• Falling crude oil prices weigh on the Canadian Dollar, restricting the scope for USD/CAD to decline.

Trading near 1.3950 in Thursday’s Asian session, USD/CAD extends its decline into a second consecutive day. The move follows heavy selling of the US Dollar (USD) after a Democratic sweep in the midterm elections handed the party control of both houses of Congress, fuelling fears of political deadlock in Washington. The election result also prompted markets to anticipate an end to the Middle East conflict. Those expectations drove oil prices sharply lower and put additional pressure on the Greenback.

October’s ADP report showed private-sector employment rising by 86,000, above the 69,000 forecast, although September’s reading was revised down from 90,000 to 86,000. Such resilient domestic figures have strengthened expectations of a Federal Reserve (Fed) rate rise, potentially limiting the US Dollar’s losses. The ISM Services PMI, meanwhile, eased from 54.9 to 54.5. Although slightly below the 54.8 forecast, the index remained comfortably in expansionary territory.

Markets assign a probability of nearly 82% to another interest rate rise in December, according to the CME FedWatch Tool. Attention now shifts to the forthcoming US data calendar, with weekly Initial Jobless Claims due on Thursday and the Nonfarm Payrolls (NFP) report scheduled for Friday.

Further declines in USD/CAD could nevertheless be contained by pressure on the commodity-sensitive Canadian Dollar (CAD) from weaker crude oil prices. Canada ranks among the largest oil exporters to the United States, leaving its currency directly exposed to falling energy prices.

Following the Democratic sweep in the US midterm elections, crude oil is retreating towards levels close to one-month lows. Markets increasingly expect the incoming Congress to press for a de-escalation of the military conflict with Iran. President Donald Trump attributed Republican election losses largely to voters’ frustration with higher petrol prices linked to the conflict, while indicating that he had no immediate plans to broaden military strikes.

Military funding for continuing operations in the Middle East is expected to face opposition from a Democratic-controlled Congress. Senate Democratic Leader Chuck Schumer has explicitly pledged to push for an end to the war. Meanwhile, recovering crude exports from the Persian Gulf have left current supply above near-term demand.

Loonie trails peers as lower-beta characteristics curb gains

Recent gains have not prevented the Canadian Dollar from lagging other major currencies, according to strategists at Scotiabank. The Loonie’s “relative performance is somewhat more underwhelming when compared to its peers, and highlights its role as a lower-beta risk and commodity currency,” they note. This underlines the currency’s tendency to respond more cautiously than higher-beta FX peers, even when market conditions are favourable.