Key Moments
- USD/CAD extends a four-day losing streak, trading near 1.4090 during Asian hours on Tuesday.
- Middle Eastern crude flows drop to a seven-day average of about 8.5 million barrels per day from more than 20 million barrels per day amid at least 10 vessel incidents.
- Fed funds futures point to unchanged rates in October and an 82.8% probability of a December hike, pressuring the US Dollar.
CAD Rises as Oil Rally and Geopolitical Risks Tighten Supply
USD/CAD continues to move lower for the fourth consecutive session, with the pair trading around 1.4090 in Asian dealings on Tuesday. The decline reflects renewed demand for the commodity-linked Canadian Dollar (CAD) as crude oil prices climb.
Oil prices advance as market participants react to intensifying geopolitical tensions in the Middle East and Eastern Europe. In the Middle East, Iran has maintained a firm stance over the Strait of Hormuz, while maritime authorities have reported multiple attacks on commercial vessels. At the same time, Saudi Arabia and Iran-backed Houthi groups in Yemen have exchanged strikes, and Russia and Ukraine have resumed targeted attacks on energy infrastructure.
These developments have generated significant disruptions to regional shipping and trade. Data from analytics firm Kpler show that crude flows through the Middle East fell to a seven-day average of about 8.5 million barrels per day last week, compared with more than 20 million barrels per day the previous week, amid at least 10 confirmed incidents involving commercial ships.
Oil Flow Disruption Snapshot
| Period | Middle East crude flows (million barrels per day) | Notes |
|---|---|---|
| Previous week | More than 20 | Before recent spike in confirmed incidents |
| Last week (7-day average) | About 8.5 | Amid at least 10 confirmed commercial vessel incidents |
BoC Policy Outlook: Balancing Weak Growth and Oil-Driven Inflation Risks
Economists at Royal Bank of Canada stress that the Bank of Canada (BoC) is operating in a challenging environment. Abbey Xu notes that the central bank is “still facing an uncomfortable balance” between soft domestic economic conditions and rising inflation risks stemming in part from higher oil prices.
RBC points out that overall inflation is only slightly above target, while core measures such as CPI excluding food and energy, CPI-trim and CPI-median are close to 2%. In their view, this backdrop is likely to keep the BoC cautious and supports a baseline scenario in which interest rates stay unchanged through 2026.
US Dollar Softens on Fed Pause Expectations
The move lower in USD/CAD is also being driven by a weaker US Dollar (USD), as traders increasingly anticipate that the Federal Reserve will keep interest rates steady. Last week, Federal Reserve Chair Kevin Warsh highlighted the resilience of the US economy but did not provide explicit guidance on the timing or probability of future rate changes.
Market pricing is broadly aligned with this cautious tone. Based on the CME FedWatch tool, fed funds futures traders expect the Fed to leave rates on hold at its October meeting, while assigning an 82.8% probability to a rate increase in December.
DXY Remains Under Pressure as Sentiment Toward Dollar Stays Fragile
Analysts at Scotiabank observe that the Dollar index remains subdued at the start of the week. They note that “the DXY closed out last week on a weak note and price action overall so far today remains defensive.” This assessment supports the view that broader Dollar sentiment is fragile as markets reassess the trajectory of Fed policy.
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