The Canadian Dollar (CAD) has weakened, with USD/CAD extending its gains for the third consecutive day and trading around 1.3840 during Asian hours on Tuesday, as lower oil prices weigh on the commodity-linked currency [1]. West Texas Intermediate (WTI) crude oil edged lower to approximately $90.60 per barrel, despite having surged 4.71% the previous day, following reports from Iran's Tasnimnews agency that Tehran has halted indirect negotiations with the United States [2]. Both sources highlight that Iran and its 'Resistance Front' allies, including Yemen, Lebanon, and Iraq, have set an agenda to block the critical Strait of Hormuz and activate additional fronts such as the Bab el-Mandeb Strait, aiming to punish Israel and its supporters [1][2]. Axios reported that Iran deployed additional naval mines in the Strait of Hormuz last week, further escalating the crisis and effectively shutting down this vital chokepoint for global oil and liquefied natural gas supplies [2].
Renewed tensions in the Middle East are fueling global inflation concerns and stoking expectations of elevated Federal Reserve policy rates, which is supporting the US Dollar and keeping USD/CAD higher [1]. Financial markets are now pricing in a potential Federal Reserve rate hike before year-end, with the CME FedWatch tool indicating a 39% probability of a quarter-point increase in December [1]. Meanwhile, US President Donald Trump has offered a more optimistic diplomatic outlook, stating that an agreement with Iran to extend the ceasefire and reopen the Strait of Hormuz could be reached 'over the next week.' Trump’s comments followed his intervention to halt a military flare-up between Israeli forces and Hezbollah in Lebanon, though he acknowledged that several unresolved details remain [1][2]. Lebanese authorities have called for any extension of the ceasefire agreement between Hezbollah and Tel Aviv to encompass all Lebanese territory [2].
On the demand side, recent economic data from China revealed stalling factory activity, intensifying fears that the world's second-largest economy is losing momentum [2]. Goldman Sachs warned that weak oil demand across both China and Europe poses a major downside risk to its fourth-quarter price forecasts of $90 a barrel for Brent crude and $83 a barrel for WTI [2]. However, the financial institution noted that persistent supply disruptions in the Middle East could still counteract sluggish demand and drive prices higher [2].
The interplay between supply disruptions in the Middle East and weak demand from China and Europe is creating volatility in oil prices, which in turn is impacting the Canadian Dollar. Elevated inflation expectations and the possibility of a Fed rate hike are supporting the US Dollar, further pressuring the CAD [1][2].
CONCLUSION
Escalating tensions in the Middle East and supply disruptions have pushed oil prices higher, but recent declines and weak demand from China and Europe are weighing on the Canadian Dollar. Market participants are closely watching diplomatic developments and Federal Reserve policy signals, with the USD/CAD pair remaining elevated amid ongoing uncertainty. The situation presents high market impact, with both oil and currency markets reacting to geopolitical and economic factors.