Canadian Dollar eyes mid-September highs vs broadly weaker USD as traders await US data

USD/CAD attracts fresh sellers on Wednesday as the US election results weigh heavily on the USD.
Sliding US bond yields and hopes for Iran diplomacy further exert pressure on the safe-haven buck.
The BoC’s hawkish stance underpins the Loonie as traders look to US macro data for some impetus.

Haresh Menghani FXStreet

The USD/CAD pair comes under renewed selling pressure on Wednesday, reversing modest weekly gains registered over the past two days amid a broad-based US Dollar (USD) weakness. Spot prices slide to the 1.3955 region during the early part of the European session, eyeing a one-and-a-half-month low, touched last Friday amid a bearish fundamental backdrop.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, tumbled to over a one-month low in reaction to US midterm election results, which saw Democrats securing majorities in both the House of Representatives and Senate. The outcome heightened political uncertainty amid concerns about a potential fiscal gridlock, which could limit government spending and hinder economic growth. Investors rushed into safe-haven government debt, triggering a fresh leg down in US bond yields and weighing on the buck.

Furthermore, hopes for Iran diplomacy turn out to be another factor exerting additional pressure on the Greenback. In fact, President Donald Trump told the Financial Times on Tuesday that the US has no immediate plans to strike Iran. Meanwhile, a senior Iranian official told Reuters that the Strait of Hormuz will reopen only if sanctions are waived and the US naval blockade ends. Adding to this, Iran's Islamic Revolutionary Guard Corps (IRGC) said that four tankers were destroyed after striking mines south of the Strait of Hormuz.

This keeps the geopolitical risk premium in play and acts as a tailwind for crude oil prices, underpinning the commodity-linked Loonie. Apart from this, the Bank of Canada's (BoC) hawkish rate hike last week, which was the first since July 2023, offers additional support to the Canadian Dollar (CAD) and backs the case for a further depreciating move for the USD/CAD pair. However, bets that the US Federal Reserve (Fed) will raise interest rates again in December might hold back traders from positioning for deeper USD losses.

Moving ahead, Wednesday's US economic docket – featuring the release of the ADP report on private-sector employment and the ISM Services PMI – will be looked upon for some impetus later during the North American session. The focus, however, will be on the closely watched monthly employment details from the US and Canada, due on Friday, which will influence the near-term trajectory for the USD/CAD pair. Meanwhile, the fundamental backdrop suggests that any attempted recovery is more likely to be sold into.

USD/CAD daily chart

Technical Analysis

The USD/CAD pair remains above the 200-day Simple Moving Average (SMA) pivotal support at 1.3893 and the 61.8% Fibonacci retracement at 1.3947, maintaining a mildly constructive near-term bias. That said, a convincing break below the latter would expose deeper cushions at the 78.6% level around 1.3852 and the structural low near 1.3731. Some follow-through selling would significantly undermine any bullish prospects.

On the topside, initial resistance is seen at the 50.0% retracement near 1.4013, followed by a thicker barrier at the 38.2% level around 1.4080 and then the 23.6% retracement at 1.4163, ahead of the cycle high near 1.4296.

(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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