Canadian Dollar Strengthens as Yields, Oil Pressure USD

Key Moments

USD/CAD retreats to around 1.3970 in Asian trading after two consecutive sessions of gains.
US 2-year and 10-year Treasury yields decline to 4.566% and 4.90%, weighing on the US Dollar.
Rising crude oil prices and a light Canadian data calendar shift CAD focus toward US midterm election outcomes.

USD/CAD Slides as Dollar Softens

USD/CAD is giving back ground after two days of advances, trading near 1.3970 during Asian hours on Wednesday. The move lower in the pair coincides with broad US Dollar (USD) weakness and falling US Treasury yields across maturities.

The US 2-year Treasury yield has declined by five basis points to 4.566%, while the benchmark 10-year yield is down six basis points at 4.90%. The pullback in yields is undermining support for the greenback and providing room for the Canadian Dollar (CAD) to edge higher.

US Midterm Elections in Focus

US voters are casting ballots in midterm elections that are seen as a key gauge of President Donald Trump’s second term. As polls close in early-reporting states, live figures from Decision Desk HQ indicate that results have been called in 201 of the 435 seats in the US House of Representatives, with Democrats winning 124 seats and Republicans securing 77.

Oil Gains Bolster the Canadian Dollar

Further pressure on USD/CAD comes from strength in the commodity-linked Canadian Dollar as crude oil prices advance. Oil is moving higher as market participants assess the status of peace discussions between the US and Iran.

According to Qatar’s Foreign Ministry spokesperson, both countries are reviewing fresh proposals from mediators intended to narrow their differences. However, Iran’s national security chief commented on social media that Washington’s response is still not satisfactory.

Meanwhile, the Financial Times reported that Donald Trump said the US has no immediate plan to strike Iran and “appears to be achieving its objectives.” He added that the US remains prepared to act if needed, though an attack may prove unnecessary, even as Israeli Prime Minister Benjamin Netanyahu has alluded to possible military action later this week.

Scotiabank: US Political Backdrop to Drive CAD

Analysts at Scotiabank highlight that local Canadian data releases are sparse in the near term. They note that “the domestic release calendar is limited ahead of Wednesday’s trade data, and near-term risk will center on the US midterms and their impact on the broader tone.” As a result, sentiment around the evolving US political landscape is expected to be a primary driver of the Canadian Dollar in upcoming sessions.

Market Drivers for the Canadian Dollar

The article also outlines several key elements that typically influence the Canadian Dollar’s performance. These include monetary policy decisions by the Bank of Canada (BoC), crude oil prices, domestic economic conditions, inflation trends, and the trade balance.

Driver	Impact on CAD
Bank of Canada interest rates	Relatively higher policy rates tend to support CAD; BoC can also use quantitative easing (CAD-negative) or tightening (CAD-positive) to adjust credit conditions.
Oil prices	As petroleum is Canada’s largest export, rising Oil prices generally boost CAD, while falling prices typically weigh on the currency.
Inflation	Higher inflation can prompt the BoC to raise interest rates, attracting capital inflows and supporting CAD.
Economic data	Stronger readings in GDP, PMIs, employment, and sentiment tend to be CAD-positive; weak data usually pressures CAD.
Trade balance	A more favorable trade balance (exports exceeding imports) typically lends support to the Canadian Dollar.
Market risk sentiment	Risk-on environments are usually CAD-positive, while risk-off episodes favor safe-haven flows and can hurt CAD.
US economic conditions	Given the US is Canada’s largest trading partner, the health of the US economy significantly influences CAD demand.

Role of the Bank of Canada

The Bank of Canada exerts substantial influence on CAD by setting the benchmark interest rate at which financial institutions lend to one another, shaping borrowing costs throughout the economy. Its primary mandate is to keep inflation within a 1-3% band, adjusting rates higher or lower to achieve that goal. In addition to rate moves, the BoC can deploy quantitative easing to loosen conditions, which is considered negative for CAD, or quantitative tightening to restrict them, which is generally supportive for the currency.

Oil, Inflation, and Macro Data as Ongoing Catalysts

Because petroleum is Canada’s largest export, shifts in Oil prices tend to have a rapid effect on the currency. Rising Oil prices often translate into higher demand for CAD and increase the likelihood of a positive trade balance, while declining prices tend to have the opposite impact.

Inflation dynamics also matter for CAD. In the current framework, higher inflation often leads central banks, including the BoC, to raise interest rates. This can draw global investors seeking higher yields, lifting demand for the Canadian Dollar.

Macroeconomic releases – such as GDP, Manufacturing and Services PMIs, labor market data, and consumer sentiment surveys – function as barometers of economic strength. Robust figures can attract foreign investment and potentially prompt tighter monetary policy, both of which are supportive for CAD. Conversely, weaker readings typically weigh on the currency.