Canadian Dollar seems vulnerable near August 7 low amid sliding oil prices, trade tensions
- USD/CAD kicks off the new week on a positive note as sliding oil prices undermine the Loonie.
- The widening US-Canada rate gap and US-Canada trade tensions further weigh on the CAD.
- The Fed’s hawkish stance and geopolitical risks offer some support to the USD and the pair.
The USD/CAD pair attracts some dip-buyers at the start of a new week, stalling Friday's modest pullback from levels beyond the 1.4000 psychological mark, or the highest since August 7. Moreover, the supportive fundamental backdrop backs the case for an extension of a nearly two-week-old uptrend.
Crude oil prices slide to an over one-week low as a recovery in shipments from Saudi Arabia eases supply concerns. Adding to this, the widening US-Canada interest rate gap and US-Canada trade tensions contribute to the Canadian Dollar's (CAD) relative underperformance against its American counterpart. In fact, the Bank of Canada (BoC) maintained its key policy interest rate at 2.25% earlier this month, while the US Federal Reserve (Fed) hiked rates for the first time in over three years last Wednesday.
On the trade-related front, the US imposed steep 50% tariffs on approximately $20 billion worth of Canadian goods on August 22. Canada, on the other hand, implemented retaliatory tariffs ranging from 15% to 50% on roughly $20 billion worth of US goods on September 8. Apart from this, the underlying US Dollar (USD) bullish tone, bolstered by the Fed's hawkish stance and escalating Middle East tensions, lends some support to the USD/CAD pair and validates the near-term constructive outlook.
In fact, the so-called dot plot revealed that Fed officials expect at least one more follow-up rate hike this year. Meanwhile, Iran laid out seven conditions for restarting talks with the US. Moreover, Iran-backed Houthis in Yemen said that they attacked sensitive sites in the Saudi capital of Riyadh on Saturday with missiles and drones. This keeps the geopolitical risk premium in play and favors USD bulls, suggesting that the path of least resistance for the USD/CAD pair remains to the downside.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair keeps a bullish near-term bias above the 100-day Exponential Moving Average (EMA) at 1.3924 and the 38.2% Fibonacci retracement at 1.3932. Spot prices have also reclaimed the 50% retracement at 1.3992, suggesting buyers retain control. The next relevant resistance is aligned at the 61.8% Fibo. retracement near 1.4052, ahead of a stronger barrier at the 78.6% level around 1.4137 and the 1.4246 swing high.
On the downside, the 50% retracement at 1.3992 offers immediate support, followed by the 38.2% level at 1.3932 and the 100-day EMA at 1.3924. A deeper break would expose the 23.6% retracement at 1.3858 before the structural floor around 1.3738.
(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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