The US dollar weakened against the Canadian dollar after a slight rise the previous day, but recovered some of its losses, trading around 1.3990 in Asian trading on Tuesday (November 2), remaining within its recent lows. The dollar's weakness stemmed from support for the Canadian dollar from a modest recovery in oil prices. As the largest exporter of crude oil to the United States, Canada's currency is highly correlated with the energy market. WTI crude oil recovered some of its losses after plunging nearly 7% the previous day, briefly trading above $97 per barrel.

The rebound in oil prices directly boosted the Canadian dollar, but the gains failed to continue.

The Canadian dollar's support in this round stemmed from the moderate recovery in oil prices. The previous day, WTI crude oil plunged nearly 7%, causing the USD/CAD pair to rise; Tuesday's rebound in oil prices partially reversed this trend, allowing the Canadian dollar to recover some lost ground. As the largest exporter of crude oil to the United States, Canada's currency's correlation with energy prices was quite direct in this round of fluctuations. For the Canadian dollar, the marginal recovery in oil prices improved expectations for terms of trade, providing the most direct fundamental support for commodity currencies. However, the fact that the USD/CAD pair recovered its losses during the session, returning to around 1.3990, indicates that the Canadian dollar's upward momentum failed to continue, and a tug-of-war between bulls and bears is currently underway.

Indirect contact between the US and Iran continues, geopolitical developments limit the extent of oil price rebound.

Oil price upside is constrained by geopolitical developments. Iran confirmed that indirect discussions with the United States aimed at resolving its eight-month conflict are ongoing. This follows several days of negotiations between Iranian officials and Qatari mediators, resulting in revised proposals but no major breakthroughs. Iranian Foreign Minister Araqchi noted that consultations remain intensive, Iran's conditions have been presented, and further progress depends on Washington's political decisions. Meanwhile, Trump previously stated he would avoid military action against Iran before the midterm elections. This statement has temporarily suppressed geopolitical risk premiums in the energy market, limiting the extent of oil price rebounds and consequently limiting the Canadian dollar's gains.

Midterm election uncertainty: Safe-haven buying of the US dollar limits Canadian dollar gains

US political developments also impact the broader economic environment. As American voters head to the polls, the Trump administration and Republicans face pressure from high energy prices. Current polls indicate that Democrats are poised to win the House of Representatives, while the race for control of the Senate remains tight. Although the Canadian dollar is currently supported, the decline in USD/CAD may be limited, as election-related uncertainty provides a boost to the safe-haven dollar. The midterm elections have sparked concerns about a potential resurgence of inflation and deficits, leading to safe-haven flows into the dollar, constraining the Canadian dollar's upward movement. This is a key reason why USD/CAD was able to recover its losses and return to around 1.3990 during the session.

Downward revision of interest rate hike expectations and AI concerns: The marginal advantage of the dollar's interest rate differential is weakening.

Interest rate expectations have been slightly adjusted due to election uncertainty: the CME FedWatch tool currently prices a 73% probability of a Fed rate hike in December, down from 80% a week ago. According to strategists at well-known institutions, the dollar and short-term US Treasury yields "fell last week as Fed Chairman Warsh maintained a patient tone amid stalled US inflation progress." They added that "concerns about slowing AI investment exacerbated this trend, casting doubt on the US growth outlook and dampening expectations of a Fed rate hike." This statement reveals the two-way pressure currently facing the dollar: on the one hand, election uncertainty is driving safe-haven buying; on the other hand, a patient policy stance and concerns about AI investment are depressing yields, weakening the dollar's interest rate advantage. For USD/CAD, the former provides support, while the latter opens up further downside potential. The hedging of these two forces is the root cause of the current back-and-forth movement around 1.3990.

in conclusion

The Canadian dollar found support from the rebound in oil prices, causing the USD/CAD pair to initially weaken, but it recovered its losses during the session, returning to around 1.3990, though it remains within its recent low range. US crude oil futures rebounded to around $97 per barrel after a nearly 7% plunge the previous day, directly improving expectations for Canada's terms of trade. However, the rise in oil prices was constrained by continued indirect contact between the US and Iran and Trump's pre-election stance of not using force, thus limiting the Canadian dollar's gains. On the US dollar front, uncertainty surrounding the midterm elections provided safe-haven support, limiting the downside for the USD/CAD pair; while Warsh's patient tone and concerns about slowing AI investment weighed on yields, with the probability of a December rate hike falling from 80% to approximately 73%. The balance of these two forces resulted in a tug-of-war around 1.3990, with the short-term direction depending on the sustainability of the oil price rebound, whether the US-Iran negotiations make substantial progress, and the repricing of inflation and deficit expectations by the midterm election results. (USD/CAD daily chart, source: EasyForex) At 10:26 Beijing time, USD/CAD was trading at 1.1.3993/94.