Rebounding oil prices lift Canadian Dollar and weigh on USD/CAD

• Crude oil’s recovery towards $95.80 per barrel supports the commodity-linked Canadian Dollar against the US Dollar, pushing USD/CAD lower.
• Immediate geopolitical concerns in energy markets ease as US-Iran diplomatic talks continue with mediation from Qatar.
• The USD remains cushioned against broader losses by safe-haven buying and uncertainty surrounding the US midterm elections.

West Texas Intermediate (WTI) crude is trading at around $95.80 per barrel, recovering modestly after a fall of nearly 7% in the previous session. The rebound is supporting the Canadian Dollar (CAD), leaving USD/CAD slightly lower at around 1.3990 during Tuesday’s Asian session after modest gains the day before. As Canada is the largest exporter of crude oil to the United States (US), its currency remains closely linked to energy markets.

Developments on the geopolitical front nevertheless continue to cap oil’s potential upside. Iran has confirmed that indirect talks with the United States to resolve their eight-month conflict remain in progress, potentially putting further pressure on crude prices. Several days of discussions between Iranian officials and Qatari mediators preceded the talks, producing revised proposals but no significant breakthrough.

According to Iranian Foreign Minister Abbas Araqchi, intensive consultations are continuing. He said Iran had presented its conditions and that further progress now rests on political decisions in Washington. US President Donald Trump had previously signalled that he would avoid military action against Iran ahead of the midterm elections.

The broader economic backdrop is also being shaped by US political developments. With American voters going to the polls for the midterm elections, high energy prices are placing growing pressure on the Trump administration and the Republican Party. Opinion polls currently favour Democrats taking the House of Representatives, although the race for control of the Senate remains tight.

Election uncertainty is lending support to the safe-haven US Dollar, which may restrict further USD/CAD losses despite the Canadian Dollar’s current strength. The midterms have prompted concerns that attention could shift back towards inflation and deficits. Interest rate expectations have consequently edged lower: the CME FedWatch Tool now puts the probability of a US Federal Reserve rate rise in December at roughly 73%, compared with 80% a week ago.

Dollar eases as patient Fed tone and AI growth worries push yields lower

According to strategists at Brown Brothers Harriman, the Dollar and short-term Treasury yields “drifted lower last week as Fed Chair Kevin Warch struck a patient tone despite stalled progress on US inflation.” The strategists also say that “concerns about an AI investment slowdown compounded the move, casting doubt on the US growth outlook and dampening Fed rate hike expectations.”