Canadian Dollar consolidates below mid-1.3800s as oil strength offsets USD Fed support

USD/CAD kicks off the new week on a subdued note amid a combination of diverging forces.
Bullish crude oil prices offset Friday’s dismal Canadian jobs report and underpin the Loonie.
Rising Fed hike bets and geopolitical risks favor USD bulls, lending some support to the pair.

Haresh Menghani FXStreet

The USD/CAD pair extends its sideways consolidative price move through the early European session on Monday and currently trades just below mid-1.3800s. Moreover, spot prices remain confined within Friday's broader range, warranting caution before placing aggressive intraday directional bias amid mixed fundamental cues.

Crude oil prices stand firm near the highest level since July 24 amid escalating US-Iran confrontation in the Strait of Hormuz. This offsets Friday's dismal Canadian employment details and offers some support to the commodity-linked Loonie. Apart from this, a modest US Dollar (USD) downtick turns out to be another factor acting as a headwind for the USD/CAD pair. The supporting fundamental backdrop, however, helps limit the downside amid relatively thin liquidity on the back of a holiday in the US and Canada.

The better-than-expected US Nonfarm Payrolls (NFP) report increased the chances of a rate hike by the US Federal Reserve (Fed) at the September 15-16 meeting amid concerns about price pressures stemming from elevated oil prices. Adding to this, the US-Iran standoff keeps the geopolitical risk premium in play, which should further act as a tailwind for the safe-haven Greenback. Hence, strong follow-through selling is needed to confirm that the USD/CAD pair's attempted recovery from last week's swing low has run out of steam.

Dollar underperforms as equity strength trumps energy tailwinds

Analysts at ING argue that, given “high energy prices and an above-consensus August NFP reading,” the Dollar “should really be doing better than it is.” They suggest the currency’s muted response “probably owes to the still constructive investment environment, where global equity markets, including emerging markets, continue to perform well.” ING notes that, among the various relationships they track, “the inverse correlation between global equities and the dollar seems to be the strongest right now – far higher than the dollar's link to oil prices.”

Traders might also opt to move to the sidelines ahead of this week's release of the latest US inflation figures – the Producer Price Index (PPI) and the Consumer Price Index on Thursday and Friday, respectively. The crucial data will be looked at for more cues about the Fed's policy path, which, in turn, will drive USD demand. Apart from this, crude oil price dynamics might influence the USD/CAD pair.

USD/CAD daily chart

Technical Analysis

The USD/CAD pair holds below the 100-day Simple Moving Average (SMA) at 1.3923 and the 50.0% Fibonacci retracement of the latest upswing at 1.3899. Spot prices, however, hold just above the 61.8% retracement, suggesting that while sellers retain control beneath the clustered overhead resistance, immediate downside follow-through may initially stall around this nearby support.

A decisive break under the 61.8% Fibo. level at 1.3817 would expose the next support at the 78.6% retracement near 1.3701, with a deeper slide pointing toward the structural floor around 1.3554. On the topside, initial resistance emerges at the 50.0% retracement at 1.3899, followed by the 100-day SMA at 1.3923, while further gains would challenge the 38.2% level near 1.3980 and the 23.6% retracement around 1.4081.

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

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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