Canadian Dollar dips as Oil slump, dovish BoC outlook underpin USD strength

• USD/CAD gains 0.27% on Tuesday and trades around 1.4070.
• Falling Oil prices weigh on the Canadian Dollar despite improving risk appetite.
• Hopes for the reopening of the Strait of Hormuz ease geopolitical concerns.

USD/CAD gains 0.27% on Tuesday and trades around 1.4070 at the time of writing, supported by weakness in the Canadian Dollar (CAD). Falling Oil prices offset the positive impact of improving risk appetite on the Loonie, as fresh prospects for negotiations over the Strait of Hormuz ease geopolitical concerns.

West Texas Intermediate (WTI) US Oil falls 0.46% on Tuesday to around $91.20 at the time of press. The decline acts as a headwind for the Canadian Dollar, as Canada is a major Oil producer and exporter. The relationship between energy prices and the Canadian currency therefore helps keep USD/CAD tilted to the upside.

Trump, however, maintains a firm stance toward Tehran. Speaking at the United Nations (UN) General Assembly, the US President calls on countries to maintain pressure on Iran and says Tehran will never obtain a nuclear weapon. He nevertheless expects the United States (US) and Iran to reach an agreement after the US elections.

On the policy side, National Bank of Canada highlights that domestic conditions argue for patience from the Bank of Canada (BoC), stating that "in Canada, we’ve pulled tightening closer on our expected timeline, but still expect the BoC to be sidelined in October as economic momentum is threatened and slack remains."

In the United States, the US Dollar (USD) also benefits from a relatively supportive monetary policy backdrop. Boston Federal Reserve (Fed) President Susan Collins said on Tuesday that she supported last week's interest-rate hike and views a somewhat more restrictive monetary policy stance as appropriate to bring inflation sustainably back toward the Fed's 2% target.

Collins notes that upside risks to inflation have increased, while labor market conditions appear somewhat stronger. Her comments reinforce the view that the Fed has some room to maintain restrictive monetary policy to contain inflationary pressures, providing additional support to the US Dollar against the Canadian Dollar.