USD/CAD Holds Firm as Fed Outlook Outweighs Oil Surge

Key Moments

USD/CAD Gains Despite Supportive Backdrop for Canadian Dollar

USD/CAD is trading on the front foot for a second straight session, hovering near 1.4270 during Asian trading on Thursday. The pair remains supported by US Dollar strength, even as the Canadian Dollar finds backing from firming crude oil prices.

Upside in the exchange rate could face headwinds from renewed demand for the commodity-linked Canadian Dollar, as energy markets react to rising geopolitical and weather-related risks.

Oil Prices Lifted by Geopolitical Tensions and Storm-Related Supply Disruptions

Crude prices have moved higher following reports that the Trump administration instructed the Pentagon to prepare potential strike options against Iran ahead of the US midterm elections. This development has run contrary to expectations that Washington would avoid escalating tensions with Tehran before the November vote.

Additional upward pressure on energy markets has come from operational disruptions in the Gulf of Mexico due to Tropical Storm Isaias. Producers have shut in more than 510,000 barrels per day of crude, amounting to roughly one quarter of the region’s total output.

Growing Political Fragmentation in Canada Adds Longer-Term Risk

Analysts at Rabobank point to rising political fragmentation within Canada as a factor that could increasingly matter for domestic assets and the Canadian Dollar over time. They highlight results from the provincial election in Quebec, where “the separatist Parti Québécois won around 30 percent of the vote… gaining 59 of 127 seats—just shy of a majority but enough to form a minority government.”

The same analysts note that centrifugal political pressures are not limited to eastern Canada. “Farther west, Alberta will vote on its own independence (or at least, the process to start considering independence) from Canada on October 19,” they observe, underscoring a broader theme of political uncertainty that investors may monitor in relation to Canadian markets.

Fed’s Hawkish Stance and Rising Yields Power the US Dollar

On the US side, the USD/CAD pair is supported by a resolutely hawkish Federal Open Market Committee (FOMC) stance toward persistent inflation risks. Minutes from the Federal Reserve’s September meeting revealed unanimous backing among all 19 policymakers for the latest rate increase, with most members indicating that another hike could be required before year-end.

While market participants generally anticipate no change in policy at the October meeting, CME’s FedWatch tool indicates traders are still pricing in a 78.3% probability of an additional rate increase in December.

US Treasury yields have also provided a firm tailwind for the Greenback. Yields have rebounded toward levels not seen since 2002, with the 10-year note trading around 5.32% and the 30-year near 5.70%. Market attention is turning to upcoming remarks from Federal Reserve officials, including Christopher Waller and Alberto Musalem, for further cues on the policy path.

Schmid Highlights AI-Driven Inflation and Argues for Restrictive Policy

A speech by Federal Reserve official Schmid has reinforced the hawkish narrative. The address registered an FXS Speechtracker score of 8/10, above the 7.5/10 historical average, signaling an unusually strong emphasis on inflation risks.

In the remarks, Schmid underlined that the labor market “remains in a good place,” while expressing concern over stubborn inflation pressures, the role of artificial intelligence as “a new major inflation driver,” and the perceived need for further work on short-term policy rates even in the face of higher long-term yields. Together, these points underscore a determination to restore and preserve the Fed’s anti-inflation credibility and suggest a bias toward keeping policy in restrictive territory for an extended period.

The FXS Fed Sentiment Index has risen by 0.34 points to 137.91, reinforcing the message that overall Fed communications are firmly in hawkish ground, well above the neutral reading of 100. The combination of an elevated sentiment index and an above-average FXS Speechtracker score indicates that markets are likely to continue pricing a Fed inclined toward tighter policy settings, a backdrop that supports the US Dollar against lower-yielding counterparts.

Canadian Dollar: Core Drivers and Market Sensitivities

The article also highlights the main fundamental levers that tend to influence the Canadian Dollar (CAD). Key drivers include the Bank of Canada’s (BoC) policy rate, the price of oil, the state of the domestic economy, inflation dynamics, and the country’s trade balance – the difference between the value of exports and imports.

Market sentiment plays an additional role. Environments characterized by “risk-on” appetite typically favor the CAD, whereas “risk-off” conditions tend to weigh on the currency. As Canada’s largest trading partner, the performance of the US economy is also a crucial factor in shaping CAD movements.