Why is the Canadian Dollar retreating as Oil price volatility eclipses hawkish BoC remarks?

• USD/CAD recovers as volatile oil prices prompt the Canadian Dollar to surrender its earlier advance.
• Persistent inflation risks could require additional rate increases, BoC Governor Tiff Macklem indicates.
• The US Dollar draws support from stronger US jobs figures ahead of Friday’s Canadian and US employment releases.

A recovery in USD/CAD on Tuesday has erased the Canadian Dollar’s (CAD) earlier gains, as a stronger US Dollar (USD) and volatile oil prices weigh on the Canadian currency. Hawkish comments from Bank of Canada (BoC) Governor Tiff Macklem are also being assessed by traders. Having bounced from an intraday low of 1.3950, the pair is trading near 1.3993 at the time of writing, virtually unchanged.

Oil price fluctuations have a significant bearing on the Loonie, given Canada’s position as a major crude exporter. Earlier on Tuesday, crude advanced following a Wall Street Journal (WSJ) report of a US strike on Iran’s Qeshm Island. Prices subsequently retreated on unconfirmed reports of concessions by Washington and Tehran concerning Iran’s nuclear programme and frozen funds. After recouping part of those losses, West Texas Intermediate (WTI) is trading flat near $95 a barrel.

During his parliamentary appearance, BoC Governor Macklem cautioned that “further rate hikes may be needed,” while emphasising that decisions would be made “meeting by meeting” given the heightened uncertainty. Higher oil prices and refinery margins, he noted, are increasing costs for businesses and consumers. More of these costs are expected to pass through to inflation over the coming year.

According to Macklem, CPI inflation is projected to climb to “3.5% by year-end,” stay “at or above 3% through much of 2027,” and move back close to the BoC’s 2% target by mid-2028.

Uncertainty over US-Iran negotiations and a hawkish outlook for the Fed are helping the US Dollar remain steady across the border. Better-than-expected US employment figures have also underpinned the Greenback. However, with the US midterm elections under way, traders are hesitant to take aggressive positions.

September’s JOLTS Job Openings increased from 7.19 million to 7.523 million, surpassing the forecast of 7.13 million. After rebounding from an intraday low of 101.63, the US Dollar Index (DXY) is trading flat near 101.80. The index measures the currency against six major peers.

Friday’s employment releases in Canada and the US are now in focus as traders weigh the possibility of further rate increases in December. Canada’s Labour Force Survey and US Nonfarm Payrolls (NFP) could influence expectations for the next policy steps from the BoC and Fed.