Canadian Dollar steadies, caught between risk aversion, rebounding Oil prices

• USD/CAD trades without a clear direction on Monday after falling sharply on Friday.
• Tensions surrounding the Strait of Hormuz sustain safe-haven demand and support the US Dollar.
• Rebounding Oil prices and solid Canadian employment data limit downside pressure on the Canadian Dollar.

USD/CAD trades around 1.3940 on Monday at the time of writing, virtually unchanged on the day, after falling sharply on Friday. The US Dollar (USD) benefits from cautious safe-haven demand as geopolitical tensions in the Middle East remain elevated, while rebounding Oil prices provide support for the Canadian Dollar (CAD).

Concerns surrounding the conflict between the United States (US) and Iran continue to weigh on risk appetite, with particular attention focused on the Strait of Hormuz. Tehran indicates that talks with Oman aimed at establishing a safe shipping route through the strategic waterway are nearing an agreement, while stressing that any potential deal would not lead to an immediate reopening.

Geopolitical risks also remain elevated after Iran-backed Houthi militants in Yemen claimed a recent attack on Saudi Arabia’s Jazan refinery. A tanker operated by Abu Dhabi National Oil Company was also targeted in the Strait of Hormuz. The persistent uncertainty encourages caution across financial markets and helps support the US Dollar.

On the economic front, the Nonfarm Payrolls (NFP) report released on Friday shows that the US economy lost 23K jobs in July, reinforcing concerns about a slowdown in the US labor market.

The figures reduce expectations of monetary tightening by the Federal Reserve (Fed). According to the CME FedWatch tool, markets now see around a 42% chance of a 25-basis-point interest-rate hike in September, down from approximately 67% a week earlier. This repricing limits the US Dollar’s ability to extend its rebound, even as geopolitical risks continue to underpin demand for the Greenback.

Investors now turn their attention to upcoming US inflation data. Higher-than-expected inflation could revive expectations of a more restrictive Fed policy stance, particularly if rebounding energy prices add to inflationary pressures.

On the Canadian side, the Canadian Dollar retains several sources of support. Employment data released on Friday were solid, while the recovery in Oil prices benefits the commodity-linked currency. West Texas Intermediate (WTI) trades around $78.70 at the time of press, gaining 3.08% on the day, supported by persistent uncertainty surrounding a potential reopening of the Strait of Hormuz.

The combination of a US Dollar supported by risk aversion and a Canadian Dollar benefiting from higher Oil prices therefore keeps USD/CAD close to 1.3940, without a clear direction at the start of the week.

Canada jobs surprise bolsters Loonie outlook but US tariff risk clouds path

Analysts at Commerzbank highlight that, “in contrast to the US labour market, the Canadian labour market delivered a very positive surprise on Friday,” with job creation far exceeding expectations. While “the median Bloomberg consensus forecast had predicted the creation of 20,000 new jobs, roughly 75,000 were actually created,” they note, adding that “in light of these figures, the unemployment rate also fell unexpectedly to 6.4%, its lowest level in two years, marking a decline of half a percentage point over the past three months.”

Against this backdrop, Commerzbank argues that “it almost seems as if the Canadian real economy is slowly recovering from the problems in its relationship with the US.” However, they stress that “this recovery is on shaky ground,” pointing to the risk that “the US president has announced new tariffs of 50% on certain Canadian goods if no agreement is reached by August 19th.”

Even so, the bank’s economists “continue to expect that an agreement on a one-year extension of USMCA will ultimately be reached.” They acknowledge the political rhetoric, noting that “although the US president regularly claims that only Canada would benefit from it, the two economies are too closely intertwined for a possible termination not causing major problems.” At the same time, they caution that “any diversification by Canada away from its largest trading partner, the US, will be a lengthy process.”

In FX terms, Commerzbank concludes that “we remain optimistic that the Canadian dollar will finally start to appreciate again in the coming months, but it will likely be a long road, with setbacks caused by the US president along the way.”

USD/CAD technical analysis

In the one-hour chart, USD/CAD trades at 1.3941, keeping a bearish near-term tone as it holds beneath the 100-period and 200-period simple moving averages (SMAs) at roughly 1.4019 and 1.4032. The pair is grinding just above nearby horizontal support at 1.3926, while the Relative Strength Index (14) hovering near 33 suggests persistent downside pressure, even as immediate losses slow around this floor.

On the topside, initial resistance is seen at the prior horizontal cap around 1.3990, followed by the 100-period SMA at 1.4019 and the 200-period SMA near 1.4032, which together form a dense supply zone capping recovery attempts. On the downside, a clear break below 1.3926 would expose fresh weakness toward lower levels, while holding above this support could allow a corrective bounce, though the broader intraday bias remains skewed to the downside while price trades under the key moving averages.

(The technical analysis of this story was written with the help of an AI tool. Know more.)