Canadian Dollar Gains Stall As Positive US-Iran Headlines Send Oil Lower

USD/CAD trades in a choppy range on Monday as a softer US Dollar (USD) and falling Oil prices pull the pair in opposite directions. At the time of writing, the pair trades around 1.3975 after touching 1.3941 on Friday, its lowest level since September 16.

Oil prices fall as traders respond to positive US-Iran diplomatic headlines. Iranian President Masoud Pezeshkian said the Supreme Leader had granted the government certain powers regarding negotiations, according to ISNA.

Earlier, Axios reported that US President Donald Trump favours giving diplomacy with Iran more time. West Texas Intermediate (WTI) trades near $96 a barrel, down more than 5% on the day. Canada is a major crude Oil exporter, leaving the Loonie sensitive to swings in Oil prices.

The US Dollar trades under pressure as falling Oil prices ease inflation concerns, at least for now, and accelerate the decline in US Treasury yields. Yields have retreated from multi-year highs as the AI-led technology-stock sell-off increased demand for government bonds.

Meanwhile, traders also turned cautious ahead of Tuesday’s US midterm elections. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 101.68, off an intraday low of 101.44 but still down 0.28% on the day.

Strategists at Brown Brothers Harriman note that betting markets currently “favor a Democratic sweep,” with platforms such as Polymarket and Kalshi “putting the odds around 70%.” They argue that this configuration “points to a relatively muted initial market reaction if Democrats win both chambers,” as such an outcome is largely anticipated. By contrast, BBH cautions that “a Republican Senate hold would be the bigger surprise and could spark more market volatility.”

However, a hawkish Federal Reserve (Fed) outlook should cushion the Greenback’s downside as policymakers remain committed to bringing inflation back to the 2% target. The Fed kept rates unchanged at 3.75%-4.00% last week following September’s 25-basis-point (bps) increase. Traders are pricing in a 74% chance of a December hike, according to the CME FedWatch Tool.

Data released on Monday showed the US ISM Manufacturing PMI rose to 55.5 in October from 54.5, beating expectations of 54.6. Meanwhile, the Prices Paid Index eased to 75.2 from 77.9, below the forecast of 77.

In Canada, the Bank of Canada (BoC) raised its policy rate by 25 basis points (bps) to 2.50% last week and left the door open to further increases. Policymakers remain concerned that elevated energy costs could spread into broader inflation.

However, Monday’s Canadian manufacturing data pointed to weaker activity. The S&P Global Manufacturing PMI fell to 49.6 in October from 51.5 in September. Traders now await Friday’s employment reports from both countries, which could provide the next major catalyst for USD/CAD.