• Higher crude oil prices support the Canadian Dollar amid mounting global supply and shipping concerns.
• Energy infrastructure attacks and disruptions in the Strait of Hormuz drastically cut Middle Eastern oil flows.
• The US Dollar faces pressure as traders expect the Fed to hold rates steady in October.

USD/CAD extends its losses for the fourth successive day, trading around 1.4090 during Asian hours on Tuesday. The pair loses ground as the commodity-linked Canadian Dollar (CAD) receives support from an upside in oil prices.

Crude oil prices advance as market traders weigh escalating geopolitical conflicts in the Middle East and Eastern Europe. In the Middle East, Iran has continued to assert control over the Strait of Hormuz, with maritime authorities reporting multiple attacks on commercial ships. Tensions further escalated as Saudi Arabia and Iran-backed Houthi militants in Yemen traded strikes, while Russia and Ukraine simultaneously resumed targeted attacks on energy infrastructure.

These growing threats to commercial shipping led to a sharp, temporary disruption in regional trade. According to analytics firm Kpler, crude flows through the Middle East fell to a seven-day average of about 8.5 million barrels per day last week, down from more than 20 million barrels per day the previous week, amid at least 10 confirmed incidents involving commercial vessels.

BoC grapples with uneasy policy trade-offs as inflation risks linger

Economists at Royal Bank of Canada underline that the Bank of Canada is still navigating a difficult policy backdrop, with Abbey Xu noting that the central bank is “still facing an uncomfortable balance” between a soft domestic economy and emerging inflation risks, particularly from higher Oil prices. With headline inflation only slightly above target and core measures such as CPI excluding food and energy, CPI-trim and CPI-median hovering near 2%, RBC judges that this tension is likely to keep policymakers cautious, reinforcing a base case in which interest rates remain on hold through 2026.

The USD/CAD pair depreciates as the US Dollar (USD) weakens on growing market expectations that the Federal Reserve (Fed) will leave interest rates unchanged. Last week, Federal Reserve Chair Kevin Warsh expressed optimism about the resilience of the US economy, though he refrained from offering specific guidance on the timing or likelihood of future rate adjustments. Financial markets are aligning with this cautious stance; according to the CME FedWatch tool, fed funds futures traders expect the central bank to keep rates unchanged at its October policy meeting, while pricing in an 82.8% probability of a December rate hike.

Dollar index stays on the back foot as defensive tone persists

Analysts at Scotiabank highlight that the Dollar index remains under pressure at the start of the week, noting that “the DXY closed out last week on a weak note and price action overall so far today remains defensive.” This reinforces their view that the broader Dollar tone is still fragile as markets reassess the outlook for Fed policy.