US Dollar weakness amid tech earnings and Middle East risk aversion lifts Canadian Dollar

USD/CAD slips as weak megacap earnings weigh on the US Dollar.
Low-yielding safe-haven currencies found favour over the US Dollar as intensifying Middle East tensions increased risk aversion.
The Canadian Dollar strengthens as WTI approaches five-week highs after Houthi attacks on Saudi oil facilities and ports.

Pressure on the US Dollar (USD) keeps USD/CAD on course for a seventh consecutive day of losses, with the pair trading near 1.4000 in Friday’s Asian session. Growing questions over whether the AI trade can be sustained have weighed on the USD. Sentiment among investors deteriorated after several megacap technology companies delivered quarterly earnings that fell short of expectations.

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

Risk aversion has also spread across markets as conflict in the Middle East intensifies. Demand for safe havens has strengthened on reports that the US and Israel are preparing further military strikes against Iran after the forthcoming midterm elections. Both the Japanese Yen and the Swiss Franc have consequently gained support against the Greenback.

On monetary policy, Federal Reserve (Fed) officials have shown little inclination to step up the pace of tightening. While recently voicing confidence in the US economy’s underlying resilience, Fed Chair Kevin Warsh offered no indication of whether further interest rate increases would be necessary. Nevertheless, despite this cautious guidance, participants using the CME FedWatch Tool currently assign a 92.8% probability to a rate hike at the forthcoming October 27–28 policy meeting.

Higher oil prices are lending support to the commodity-linked Canadian Dollar (CAD), adding to the decline in USD/CAD. With geopolitical tensions and supply risks in the Middle East intensifying, WTI continues to trade close to its highest level in five weeks.

Responsibility for recent attacks on Saudi Arabia’s Red Sea port of Yanbu was claimed by Iran-backed Houthi militants in Yemen. They also claimed deadly strikes on an oil field and an airport in the world’s largest crude oil exporter.

Adding to the concerns are reports that the US and Israeli militaries have prepared plans for possible fresh attacks on Iran following next month’s midterm elections. Iran’s energy infrastructure is likely to be a principal target. In Europe, meanwhile, Ukraine has stepped up strikes on Russian oil refineries against the backdrop of a US-Russia agreement on diesel supplies.

Canadian Dollar: Key Questions Answered

Which factors shape the Canadian Dollar’s direction?

Movements in the Canadian Dollar (CAD) depend chiefly on interest rates set by the Bank of Canada (BoC), oil prices, the strength of Canada’s economy, inflation and the trade balance. Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Investor appetite for risk also matters: a shift towards riskier assets (risk-on) generally supports the CAD, whereas a preference for safe havens reflects risk-off sentiment. The strength of the US economy is another important influence, given that the US is Canada’s largest trading partner.

Why do Bank of Canada decisions matter for the Canadian Dollar?

By determining the interest rate at which banks lend to one another, the Bank of Canada (BoC) exerts considerable influence over the Canadian Dollar. That rate, in turn, affects borrowing rates across the economy. Keeping inflation within 1-3% is the BoC’s primary objective, pursued through increases or reductions in interest rates. Relatively higher rates generally support the CAD. Credit conditions can also be influenced through quantitative easing or quantitative tightening: easing is negative for the CAD, while tightening is positive.

Why is the Canadian Dollar sensitive to oil prices?

As petroleum is Canada’s largest export, changes in oil prices tend to feed directly into the Canadian Dollar’s value. A rise in oil prices generally lifts the CAD by increasing overall demand for the currency; falling oil prices tend to have the reverse effect. More expensive oil also increases the likelihood of a positive trade balance, providing further support to the CAD.

Why can inflation figures move the Canadian Dollar?

Traditionally, inflation was regarded as harmful to a currency because it erodes the value of money. In modern times, however, the easing of cross-border capital controls has seen the reverse relationship emerge. As higher inflation tends to prompt central banks to raise interest rates, global investors seeking attractive returns are encouraged to bring in more capital. The resulting inflows increase demand for the domestic currency, which in Canada is the Canadian Dollar.

What do economic releases mean for the Canadian Dollar?

The Canadian Dollar can respond to macroeconomic releases because they offer a measure of economic health. GDP, Manufacturing and Services PMIs, employment figures and consumer sentiment surveys can all shape the CAD’s direction. Economic strength supports the currency by drawing in additional foreign investment and potentially encouraging the Bank of Canada to raise interest rates. Weak economic readings, by contrast, are likely to weigh on the CAD.