Canadian Dollar eases from highs as risk aversion buoys the US Dollar

The Canadian Dollar (CAD) is giving back previous daily gains against the US Dollar (USD) on Tuesday, as the risk-off mood amid escalating tensions in the Middle East offsets the positive impact of higher Crude prices on the commodity-sensitive Loonie. The USD/CAD pair has returned above 1.3800 from session lows at 1.3775, although it holds marginal lows on the daily chart.

Market sentiment remains frail on Tuesday as hopes of a negotiated end to the Middle East conflict move further away. Iranian authorities threatened on Monday with attacks on energy infrastructure across the Gulf, including US Oil and Gas interests, if their country is targeted again, and Qatar authorities have called for efforts to reopen the key Strait of Hormuz to avoid an “industrial catastrophe”.

The stalemate in the US-Iran conflict, which has extended for six months, has pushed Brent Oil prices to two-month highs above $97.00 per barrel, keeping the Canadian Dollar from depreciating further, as Crude Oil is Canada's main export.

CAD underperforms as US payrolls surprise and BoC support fades

On the macroeconomic front, TD Securities' analysts observe that the latest labour market data delivered a clear blow to the Canadian Dollar, amid a “genuine upside surprise in US payrolls and downside surprise in Canada,” according to the experts, “to overwhelm the temporary support from the BoC's hawkish tilt.”

Looking ahead, TD Securities "expect(s) CAD to underperform its peers going forward,” even as trade developments inject headline risk. While “tariff headlines may generate volatility into the September 8 deadline,” TD Securities cautions that “a meaningful breakthrough appears unlikely and the broader USMCA outlook remains largely unchanged,” limiting the scope for a sustained CAD rebound.

Regarding the Greenback, strategists at Brown Brothers Harriman highlight that Brent crude's surge after “Iran-backed Houthi militants reportedly targeted Saudi oil facilities on Monday and Tuesday (...) is weighing on stocks and bonds, while giving USD a modest lift.”

Nonetheless, BBH stresses that “Friday’s US August CPI report remains the main near-term market driver that will decide the Fed’s September 16 rate decision.” In their view, “a hot CPI print would all but seal a September hike and underpin a firmer USD,” whereas “a cooler reading would strengthen the case for a hold and leave USD vulnerable to a dovish Fed repricing.”