Canadian Dollar seems vulnerable near two-month low as USD maintains bullish undertone
- USD/CAD prolongs a multi-week-old upward trajectory amid a supportive fundamental backdrop.
- A relatively dovish BoC stance and the recent slide in oil prices continue to undermine the Loonie.
- The USD sits near a two-month high amid elevated US bond yields and geopolitical uncertainties.
The USD/CAD pair holds steady around the 1.4235 area during the Asian session on Thursday, consolidating its recent strong gains registered over the past four weeks or so. Meanwhile, the fundamental backdrop seems tilted in favor of bulls and suggests that the path of least resistance for spot prices remains to the upside.
The Canadian Dollar (CAD) continues with its relative underperformance amid the Bank of Canada's (BoC) predominantly dovish policy stance and US-Canada trade tensions. Adding to this, the recent slide in crude oil prices further undermines the commodity-linked Loonie, which, along with a bullish US Dollar (USD), acts as a tailwind for the USD/CAD pair and validates the near-term positive outlook.
The US PCE data, released on Wednesday, tempered market bets for an October Federal Reserve (Fed) rate hike, though oil-driven inflation fears keep US bond yields elevated near multi-year highs. Furthermore, traders are still pricing in a greater chance that the US central bank will raise borrowing costs by the end of this year. This, along with the US-Iran standoff, continues to support the Greenback.
In the latest developments surrounding the Middle East crisis, US President Donald Trump had turned down a seven-day ceasefire proposal from Iran. Moreover, US officials believe that Trump could order a return to major combat after the November midterm elections. This keeps the geopolitical risk premium in play, favoring USD bulls and backing the case for a further move up for the USD/CAD pair.
Traders now look forward to the US economic docket – featuring the usual Weekly Initial Jobless Claims and the ISM Manufacturing PMI. This, along with speeches from a slew of influential FOMC members and the incoming geopolitical headlines, will drive the USD. Apart from this, oil price dynamics should provide some impetus to the USD/CAD pair ahead of the US Nonfarm Payrolls (NFP) report on Friday.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair keeps a bullish near-term bias in place, though is stretched on momentum. In fact, the Relative Strength Index (14) is hovering in overbought territory near 78, which hints that upside may be vulnerable to a corrective pause rather than a sustained acceleration at current levels.
Nevertheless, the broader setup favors dips being bought, even if overbought conditions trigger short-term consolidation or a mild pullback. Hence, any corrective slide is more likely to attract some buyers near the 1.4200 round figure ahead of the 1.4170-1.4165 region, below which the USD/CAD pair could slide to the 1.4100 mark.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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