Canadian Dollar at seven-week high as US election results come under market scrutiny

• Fresh US Dollar selling following the US midterm results lifts the Canadian Dollar.
• Macklem’s hawkish comments underpin the Loonie as USD/CAD slides to seven-week lows.
• Focus shifts to the ISM Services PMI after US ADP employment exceeds forecasts.

USD/CAD slides to seven-week lows on Wednesday, with the Canadian Dollar (CAD) strengthening around 0.50% against the US Dollar (USD). Renewed selling in the Greenback following the US midterm election results drives the move, leaving the pair trading near 1.3933 at the time of writing.

Weighing on the Dollar is the Democrats’ sweep of the House and Senate, which puts Congress and the White House under the control of opposing parties. At around 101.30, the US Dollar Index (DXY) stands at its weakest since September 30. The index measures the Greenback against a basket of six major currencies.

Oil prices also declined on Tuesday, as traders assessed whether a Congress controlled by Democrats could increase pressure on Trump to bring the war with Iran to an end.

For economists at ING, the US midterm result represents a decisive turning point in Washington’s policy-making. They now expect a Democrat-controlled Congress to “stifle President Trump’s domestic agenda in his final two years in power.”

Under this changed balance of power, ING’s economists believe that “spending and tax proposals, as with most domestic legislation, will likely be gridlocked,” effectively ruling out a fresh fiscal boost. They nevertheless warn against treating a lack of new stimulus as fiscal consolidation, noting that “while we won’t see any further fiscal expansion, large fiscal deficits and deteriorating debt dynamics will continue.”

Further near-term declines in the US Dollar could, however, be contained by robust US economic growth and a hawkish outlook for the Federal Reserve (Fed). Expectations of additional rate hikes remain supported by inflation risks arising from the Middle East energy shock.

ADP data showed an October increase of 86K in US private-sector employment, above the expected 69K. The September rise, initially reported at 90K, was revised lower to 86K.

For further indications of the US economy’s health, markets now await October’s ISM Services PMI, scheduled for release later during American trading hours.

The Loonie also draws support from the hawkish comments of Bank of Canada (BoC) Governor Tiff Macklem. Appearing before parliament on Tuesday, Macklem said “further rate hikes may be needed,” while emphasising that heightened uncertainty meant decisions would be made “meeting by meeting”.