Canadian Dollar regains lost ground amid higher Oil prices, US midterm elections

The Canadian Dollar (CAD) is taking back some losses against the US Dollar (USD) on Tuesday, favoured by a moderate rebound in Crude prices, as the US resumed hostilities in Iran. The USD/CAD pair has retreated below 1.3960 from session highs just below 1.4000 and is nearing the seven-week low of 1.3941 as the US Dollar loses ground amid the uncertainty surrounding the mid-term elections.

Crude prices have bounced up on Tuesday, providing some support to the Loonie, as Crude is Canada’s main export. The barrel of Brent Oil appreciated about 2.8%, to levels beyond $106.00 on Tuesday, following news reporting that the US military launched “defensive” strikes in the Iranian island of Qeshm, which cast serious doubts on the fate of the latest attempts to resume peace negotiations.

Oil prices are likely to remain higher for longer, analysts say

Looking forward, TD Securities’ analysts see Brent crude in a “higher for longer” pricing regime, with “medium-term fair value for Brent crude oil in the $90-100/bbl region after the eventual conclusion of the conflict in the Middle East.” TD Securities argues that  the market will need “one to two years of surpluses to rebuild inventories and buffers to required levels.” This will keep Oil prices elevated and keep a floor on the commodity-sensitive Canadian Dollar.

In the US, data released on Monday revealed that factory activity accelerated beyond expectations in October, according to the US ISM Manufacturing Purchasing Managers' Index (PMI) release. This highlights strong domestic demand and reinforces the view of US economic exceptionalism.

The US Dollar, however, has failed to draw any significant support from the data, as investors remain attentive to the outcome of the US midterm elections taking place on Tuesday. Opinion polls point to a Democrat victory in Congress and a close race for the US Senate.

In Canada, the main focus on Tuesday will be on the Bank of Canada’s (BoC) Governor Tiff Macklem’s speech. The BoC hiked interest rates last week and hinted at further hikes to come, and investors will be eager to know more about the timing and the scope of the bank’s tightening cycle.