Canadian Dollar advance stalls as Oil falls on positive US-Iran news

• Lower Oil prices and a weaker US Dollar leave USD/CAD without a clear direction.
• Despite the BoC’s hawkish stance, the Canadian Dollar faces pressure from WTI’s steep fall.
• The next move in the pair may hinge on the US midterm elections and Friday’s employment figures.

At around 1.3975 at the time of writing, USD/CAD is trading above Friday’s low of 1.3941, its weakest level since 16 September. Monday’s trading remains choppy, with a weaker US Dollar (USD) and declining Oil prices exerting opposing pressures on the pair.

Encouraging reports on US-Iran diplomacy have sent Oil prices lower. According to ISNA, Iranian President Masoud Pezeshkian said the Supreme Leader had given the government certain powers over negotiations. An earlier Axios report said US President Donald Trump favours allowing more time for diplomacy with Iran. Down more than 5% on the day, West Texas Intermediate (WTI) is trading near $96 a barrel. The Loonie is exposed to fluctuations in Oil prices because Canada is a major crude Oil exporter.

Lower Oil prices are easing inflation worries, at least for the time being, and hastening the fall in US Treasury yields, keeping the US Dollar under pressure. Increased demand for government bonds during the AI-led sell-off in technology shares has drawn yields back from multi-year highs.

Caution has also taken hold among traders before Tuesday’s US midterm elections. After reaching an intraday low of 101.44, the US Dollar Index (DXY) is trading around 101.68, though it remains 0.28% lower on the day. The index measures the Greenback against a basket of six major currencies.

Betting markets currently “favor a Democratic sweep,” according to strategists at Brown Brothers Harriman, who cite platforms including Polymarket and Kalshi as “putting the odds around 70%.” With that outcome largely expected, the strategists say the configuration “points to a relatively muted initial market reaction if Democrats win both chambers,” while BBH warns that “a Republican Senate hold would be the bigger surprise and could spark more market volatility.”

The Greenback’s losses should nevertheless be limited by a hawkish outlook for the Federal Reserve (Fed), whose policymakers remain focused on returning inflation to the 2% target. Following a 25-basis-point (bps) rise in September, the Fed left rates at 3.75%-4.00% last week. The CME FedWatch Tool shows traders assigning a 74% probability to a December increase.

October’s US ISM Manufacturing PMI climbed from 54.5 to 55.5, exceeding the 54.6 forecast, figures published on Monday showed. In contrast, the Prices Paid Index slipped from 77.9 to 75.2, undershooting expectations of 77.0.

Last week, the Bank of Canada (BoC) increased its policy rate by 25 basis points (bps) to 2.50% without ruling out additional rises. Canadian policymakers continue to worry that high energy costs could feed through to inflation more broadly.

Canada’s manufacturing figures on Monday, however, signalled a slowdown in activity. A decline was recorded in the S&P Global Manufacturing PMI, which dropped from September’s 51.5 to 49.6 in October. Attention now turns to Friday’s employment releases from both countries as a potential source of the next significant move in USD/CAD.