USD/CAD climbs to a near two-week high and draws support from a combination of factors.
Reduced bets for more BoC rate hikes overshadow bullish Oil prices and undermine the Loonie.
Hawkish Fed expectations, elevated US bond yields and geopolitical risks benefit the Greenback.
Traders now look to the US macro data for some impetus ahead of Fed Chair Powell’s speech.
The USD/CAD pair gains some positive traction for the third successive day on Thursday and advances to a near two-week high, around the 1.3735 region heading into the European session. The Canadian Dollar (CAD) continues to be weighed down by softer domestic consumer inflation figures released on Tuesday, which forced market participants to trim bets for another rate hike by the Bank of Canada.
This, to a larger extent, overshadows a generally positive tone around Crude Oil prices, bolstered by concerns about disruption to global supplies on the back of geopolitical tensions in the Middle East. Adding to this, a larger-than-expected inventory draw in the United States (US) – the world’s biggest Oil consumer – acts as a tailwind for the black liquid, albeit does little to lend any support to the commodity-linked Loonie.
The US Dollar (USD), on the other hand, is underpinned by the prevalent risk-off environment and growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer. The market sentiment remains fragile in the wake of fears that the Israel-Hamas conflict could spill over into the Middle East region. Furthermore, worries about economic headwinds stemming from rapidly rising borrowing costs further tempers investors’ appetite for perceived riskier assets and benefits the safe-haven Greenback.
Meanwhile, the upbeat US Retail Sales figures for September released on Tuesday suggested that the economy ended the quarter on a strong note and pushed up fears of sticky inflation. This should allow the Fed to retain its hawkish stance and lead to a further rise in the US Treasury bond yields, which, in turn, continues to boost the USD.
The yield on the benchmark 10-year US government bond climbs to a fresh 16-year peak and moves well within the striking distance of the 5% psychological mark. The current market pricing, however, is pointing to a greater chance that the US central bank will hold interest rates steady for the second straight time in November. This, in turn, is holding back the USD bulls from placing aggressive bets and keeps a lid on any further gains for the USD/CAD pair. Traders also seem reluctant and look to Fed Chair Jerome Powell’s speech for cues about the future rate-hike path. The outlook will play a key role in driving the USD and provide some impetus to the major. Heading into the key event risk, the US macro data – Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Existing Home Sales data – could produce short-term opportunities.
Technical Outlook
From a technical perspective, the overnight sustained strength and acceptance above the 1.3700 mark could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and are still far from being in the overbought territory. This, in turn, suggests that the path of least resistance for the USD/CAD pair is to the upside. Hence, a subsequent move up towards retesting the multi-month high, around the 1.3785 area touched last Wednesday, looks like a distinct possibility. Some follow-through buying beyond the 1.3800 round-figure mark should allow bulls to challenge the YTD peak, around the 1.3860 area touched on March 10.
On the flip side, the 1.3700 round figure now seems to protect the immediate downside. Any further decline is more likely to attract fresh buying near the 1.3655-1.3650 region. This, in turn, should help limit losses near the 1.3600 mark, representing the 100-day Simple Moving Average (SMA). The latter is followed by the 200-period SMA on the 4-hour chart, currently around the 1.3575 zone, which if broken decisively will shift the bias in favour of bearish traders. Spot prices might then turn vulnerable to accelerate the slide further towards the 1.3500 psychological mark.
