Canadian Dollar remains on the front foot vs soft USD; lacks bullish conviction
- USD/CAD kicks off the new week on a softer note amid a combination of negative factors.
- Rising oil prices underpin the Loonie and weigh on the pair amid a modest USD downtick.
- Reviving September Fed rate hike bets and the US-Canada trade war help limit deeper losses.
The USD/CAD pair pulls back from an over two-week high, around the 1.3910-1.3915 region, earlier this Monday, stalling the recent goodish recovery from a three-month low. Spot prices, however, lack follow-through selling and trade just below the 1.3900 mark during the early European session.
A further escalation of tensions between the US and Iran triggers a fresh leg up in crude oil prices, underpinning the commodity-linked Loonie. The US Dollar (USD), on the other hand, attracts some sellers and erodes a part of Friday's strong move up to a two-week high. These turn out to be key factors acting as a headwind for the USD/CAD pair. However, reviving bets for a rate hike by the US Federal Reserve (Fed), along with geopolitical uncertainties, should help limit losses for the safe-haven USD and the currency pair.
In the latest developments surrounding the Middle East crisis, US forces struck two rocket launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday. This, in turn, prompted Iran to retaliate by launching ballistic missiles on two US bases in Jordan. Moreover, US Treasury Secretary Scott Bessent said that new secondary sanctions were likely to be unveiled weekly in the effort to pressure Iran.
Meanwhile, Fed Chair Kevin Warsh, speaking at the central bank's annual symposium in Jackson Hole, hinted that interest rates could need to move higher if more progress isn’t made on easing price pressures. This comes on top of inflation risks stemming from rising energy prices and lifts market bets that the US central bank will raise borrowing costs in September, which, in turn, favors USD bulls.
Apart from this, the deepening US-Canada trade war could limit any meaningful appreciation for the Canadian Dollar (CAD), warranting some caution before placing aggressive bearish bets on the USD/CAD pair. Traders might also opt to wait on the sidelines ahead of the Bank of Canada (BoC) rate decision on Wednesday and the crucial monthly jobs report from the US and Canada on Friday.
USD/CAD daily chart
Technical Analysis
The USD/CAD pair keeps a bearish near-term tone beneath the 100-day Simple Moving Average (SMA) at 1.3917 and the 38.2% Fibonacci retracement at 1.3922. On the downside, initial support is seen at the 23.6% Fibo. retracement at 1.3847, ahead of the structural floor anchored at 1.3727. On the topside, immediate resistance comes at the 100-day SMA at 1.3917, followed by the 38.2% retracement at 1.3922, with stronger barriers aligning at 1.3982, 1.4043 and 1.4129 before the cycle high near 1.4238.
(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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