Canadian Dollar holds steady as oil prices extend their recovery

• A recovery in WTI prices bolsters Canada’s export earnings, while USD/CAD holds steady.
• The safe-haven dollar remains subdued as Democratic election wins fuel expectations of political gridlock and hopes for diplomacy with Iran.
• Key US jobs figures are in focus as traders assess the Fed’s likely December rate decision.

At around 1.4010 in Friday’s Asian session, USD/CAD is little changed following modest gains the day before. Higher oil prices are supporting the commodity-linked Canadian Dollar (CAD), leaving the pair potentially vulnerable to losses. Canada, one of the world’s largest oil producers and a major supplier to the United States (US), benefits directly when crude prices rise. By boosting export earnings and improving the country’s terms of trade, dearer oil traditionally supports the CAD; lower prices, by contrast, tend to weigh on the currency.

West Texas Intermediate (WTI) crude has meanwhile picked up as traders weigh a recovery in Middle Eastern supplies against the geopolitical implications of the US midterm elections. Following Wednesday’s sell-off, oil prices continued to recover, partly reflecting the Democrats’ sweep of both the House and the Senate. The result fuelled speculation that US President Donald Trump could come under greater pressure to bring the eight-month conflict with Iran to an end. A rapid resolution remains uncertain, however, as market participants reassess whether the election results will in fact deliver a swift end to the war.

Caution across markets ahead of important economic releases is providing support for the US Dollar (USD), helping to keep USD/CAD steady. Investors are looking to the US Nonfarm Payrolls (NFP) report as a crucial influence on expectations for the Federal Reserve’s December policy decision.

Against that support, lower US bond yields of late and continued hopes of diplomatic progress with Iran are keeping the safe-haven dollar under pressure. Expectations of political deadlock in Washington have also increased following the Democrats’ victory. Such gridlock could restrict government spending and, ultimately, slow economic growth.

The dollar’s post-election weakness should not be overinterpreted, according to strategists at OCBC, who say they “would be cautious about extrapolating the initial USD sell-off into a sustained decline.” In their view, Democratic control of Congress “does not mean unrestricted policy power,” as “major legislation” remains “vulnerable to President Trump's veto.” The bank further stresses that Democrats “lack the two-thirds majorities in both chambers needed to override it,” indicating that the room for far-reaching policy changes is still limited. That constraint, in turn, weakens the argument for a structurally softer USD at this stage.