Why is the Canadian Dollar strengthening as lower Treasury yields and higher oil prices put pressure on USD/CAD?

USD/CAD retreats as lower US Treasury yields weigh on the US Dollar.
Democrats are ahead of Republicans in early US House calls as initial midterm election results emerge.
Crude oil gained as US-Iran diplomacy continued alongside conflicting indications about possible military action.

A weaker US Dollar (USD) and declining Treasury yields across the curve are weighing on USD/CAD, which trades near 1.3970 in Wednesday’s Asian session after two consecutive days of gains. US 2-year Treasury yields eased five basis points to 4.566%, while the benchmark 10-year yield declined six basis points to 4.90%.

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

The midterm elections offer a crucial verdict on President Donald Trump's second term as US citizens cast their votes. With polling ending in the first states, live figures from Decision Desk HQ show that 201 of the 435 US House seats have been called: Democrats have secured 124 and Republicans 77.

Higher crude oil prices are lending support to the commodity-linked Canadian Dollar (CAD), putting further pressure on USD/CAD as investors assess the continuing US-Iran peace talks. According to Qatar’s Foreign Ministry spokesperson, the two 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 was still unsatisfactory.

According to the Financial Times, 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 the possibility of military action later this week.

Will US midterms drive CAD as domestic data releases thin out?

With few near-term catalysts on the domestic economic calendar, Scotiabank analysts highlight 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." As a result, sentiment towards the US political backdrop remains the principal influence on the Canadian Dollar over the coming sessions.

Canadian Dollar: Frequently Asked Questions

Which factors matter most for the Canadian Dollar?

Interest rates set by the Bank of Canada (BoC), oil prices, economic health, inflation and the trade balance are among the main influences on the Canadian Dollar (CAD). Oil is Canada’s largest export, while the trade balance measures the difference between the value of the country’s exports and imports. Investor sentiment also matters: a willingness to hold riskier assets, known as risk-on, supports CAD, whereas risk-off sentiment reflects a preference for safe havens. The strength of the US economy is another important consideration, given that the US is Canada’s largest trading partner.

Why do Bank of Canada decisions affect the Canadian Dollar?

By setting the interest rate at which banks lend to each other, the Bank of Canada (BoC) exerts considerable influence over the Canadian Dollar and borrowing rates throughout the economy. Its primary objective is to keep inflation within 1-3%, raising or lowering interest rates as needed. Relatively high rates generally support CAD. To alter credit conditions, the Bank of Canada can also deploy quantitative easing or quantitative tightening; easing is negative for CAD, while tightening is positive.

Why are oil prices important for the Canadian Dollar?

As petroleum is Canada’s largest export, changes in oil prices generally feed through immediately to the Canadian Dollar’s value. Rising oil prices usually lift CAD by increasing overall demand for the currency, while falling prices have the reverse effect. Costlier oil also makes a trade surplus more likely, providing further support to CAD.

Why can inflation figures move the Canadian Dollar?

Inflation traditionally had a negative association with currencies because it erodes the value of money. In modern times, however, the easing of cross-border capital controls has reversed that relationship. When inflation rises, central banks tend to increase interest rates, drawing capital from global investors seeking attractive returns. Demand for the domestic currency consequently rises, which in Canada means greater demand for the Canadian Dollar.

What do economic releases mean for the Canadian Dollar?

The Canadian Dollar can respond to macroeconomic releases because these figures indicate the economy’s health. GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys can each shape CAD’s direction. Economic strength supports the currency by drawing foreign investment and potentially prompting the Bank of Canada to raise interest rates. Weak economic readings, by contrast, are likely to weigh on CAD.