Canadian Dollar rises to seven-week high as markets digest US election results

• The Canadian Dollar gains as US midterm results trigger fresh selling in the US Dollar.
• USD/CAD falls to seven-week lows, while Macklem’s hawkish remarks support the Loonie.
• US ADP employment beats expectations, with attention turning to the ISM Services PMI.

The Canadian Dollar (CAD) gains around 0.50% against the US Dollar (USD) on Wednesday, pushing USD/CAD to seven-week lows as the Greenback faces fresh selling pressure following the US midterm election results. At the time of writing, the pair trades around 1.3933.

The Dollar comes under pressure as Democrats’ sweep of the House and Senate leaves Congress and the White House controlled by opposing parties. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.30, its lowest level since September 30.

Meanwhile, Oil prices also eased on Tuesday as traders weighed whether a Democratic-controlled Congress could put greater pressure on Trump to end the war with Iran.

Economists at ING argue that the US midterm outcome marks a clear inflection point for policy-making in Washington, with a Democrat-controlled Congress now expected to “stifle President Trump’s domestic agenda in his final two years in power.”

In their view, the new balance of power implies that “spending and tax proposals, as with most domestic legislation, will likely be gridlocked,” effectively shutting the door on any fresh fiscal push. However, ING cautions that the absence of new stimulus does not equate to fiscal consolidation, stressing that “while we won’t see any further fiscal expansion, large fiscal deficits and deteriorating debt dynamics will continue.”

Even so, resilient US economic growth and a hawkish Federal Reserve (Fed) outlook could limit further US Dollar losses in the near term. Inflation risks from the Middle East energy shock continue to support expectations of further rate hikes.

On the data front, US private-sector employment rose by 86K in October, according to ADP, beating expectations of 69K. September’s gain was revised down to 86K from 90K.

Attention now turns to October’s ISM Services PMI, due later during American trading hours, for further clues on the health of the US economy.

On the Canadian side, hawkish remarks from Bank of Canada (BoC) Governor Tiff Macklem lend additional support to the Loonie. During his parliamentary appearance on Tuesday, Macklem said “further rate hikes may be needed,” but stressed that decisions would be taken “meeting by meeting” amid elevated uncertainty.