Canadian Dollar climbs to seven-week high as markets weigh US election results

• US midterm results prompt renewed US Dollar selling, lifting the Canadian Dollar.
• Macklem’s hawkish comments underpin the Loonie as USD/CAD drops to seven-week lows.
• Stronger-than-expected US ADP employment precedes the next focus, the ISM Services PMI.

A gain of around 0.50% for the Canadian Dollar (CAD) against the US Dollar (USD) on Wednesday takes USD/CAD to seven-week lows. Renewed selling of the Greenback follows the US midterm election results, with the pair trading near 1.3933 at the time of writing.

With Democrats taking both the House and Senate, Congress and the White House are now in the hands of opposing parties, weighing on the Dollar. Around 101.30, the US Dollar Index (DXY) stands at its lowest since 30 September. The index measures the Greenback against a basket of six major currencies.

Oil prices also slipped on Tuesday, as traders assessed whether a Congress controlled by the Democrats could increase pressure on Trump to bring the war with Iran to an end.

For economists at ING, the US midterm result represents a distinct turning point in Washington policy-making. They now expect a Democrat-controlled Congress to “stifle President Trump’s domestic agenda in his final two years in power.”

Under this new balance of power, ING believes that “spending and tax proposals, as with most domestic legislation, will likely be gridlocked,” effectively ruling out a fresh fiscal boost. Yet the bank warns against interpreting a lack of additional stimulus as fiscal consolidation: “while we won’t see any further fiscal expansion, large fiscal deficits and deteriorating debt dynamics will continue.”

Further near-term declines in the US Dollar could nevertheless be contained by robust US economic growth and a hawkish outlook for the Federal Reserve (Fed). Expectations of additional interest rate rises remain supported by inflation risks stemming from the Middle East energy shock.

ADP reported an 86K increase in US private-sector employment in October, above the 69K forecast. The September rise, meanwhile, was revised from 90K to 86K.

Due later in the American session, October’s ISM Services PMI is the next focus as markets seek further indications of the US economy’s health.

The Loonie also draws support from hawkish comments by Bank of Canada (BoC) Governor Tiff Macklem. Appearing before parliament on Tuesday, he said “further rate hikes may be needed,” while emphasising that, given heightened uncertainty, decisions would be made “meeting by meeting”.