Canadian Dollar gains as US Dollar weakens following Democratic election sweep
- The US Dollar weakened due to political gridlock fears following a Democratic sweep in midterm elections.
- Recent US economic data supports the Federal Reserve's hawkish stance, capping the Greenback's downside.
- The Canadian Dollar faces challenges from falling crude oil prices, limiting the USD/CAD pair's downside.
USD/CAD loses ground for the second successive day, trading around 1.3950 during Asian hours on Thursday. The pair depreciates as the US Dollar USD) faced heavy selling pressure after a Democratic sweep in the midterm elections resulted in control of both houses of Congress, raising concerns over potential political gridlock in Washington. Additionally, market expectations of an end to the Middle East conflict following the election outcome triggered a sharp drop in oil prices, adding further pressure on the Greenback.
However, the US Dollar's decline may remain limited as the resilient domestic economic data reinforced Federal Reserve (Fed) rate hike odds. Private-sector employment grew by 86,000 in October, according to the ADP report, beating the expected 69,000, though September’s figure was revised downward to 86,000 from 90,000. Meanwhile, the ISM Services PMI slipped slightly to 54.5 from 54.9, just below the forecasted 54.8, but remained safely within expansionary territory.
According to the CME FedWatch Tool, markets are currently pricing in nearly 82% probability of another rate hike in December. Investors are now turning their attention to upcoming US economic releases, including weekly Initial Jobless Claims on Thursday and the Nonfarm Payrolls (NFP) report on Friday.
However, the downside of the USD/CAD pair could remain restrained as the commodity-linked Canadian Dollar (CAD) faces pressure from declining crude oil prices. Because Canada is one of the largest oil exporters to the United States, lower energy prices directly weigh on the Canadian currency.
Crude oil falls toward near one-month lows following a Democratic sweep in the US midterm elections, which fueled market expectations that the incoming Congress will push to de-escalate the military conflict with Iran. President Donald Trump acknowledged that Republicans suffered election losses largely due to voter frustration over rising gasoline prices tied to the conflict, while signaling no immediate plans to expand military strikes.
A Democratic-controlled Congress is expected to challenge military funding for ongoing Middle East operations, with Senate Democratic Leader Chuck Schumer explicitly pledging to press for an end to the war. At the same time, crude exports from the Persian Gulf have started to recover, creating a market environment where current supply exceeds near-term demand.
Loonie lags peers as lower-beta profile tempers gains
Strategists at Scotiabank observe that, despite recent gains, the Canadian Dollar is failing to keep pace with other major currencies. They note that the Loonie’s “relative performance is somewhat more underwhelming when compared to its peers, and highlights its role as a lower-beta risk and commodity currency,” reinforcing its tendency to move more cautiously than higher-beta FX counterparts even in supportive market conditions.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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