The USD/CAD rises for the second day in a row amid bearish crude oil prices.
Bets that the Fed is done hiking are weighing on the USD and limiting the upside.
The mixed fundamental backdrop warrants caution for aggressive bullish traders.
The USD/CAD is attracting some buyers for the second consecutive day, although it remains below the overnight swing high in the early European session. The recent slump in crude oil prices to above a four-month low hit on Thursday continues to undermine the commodity-linked Loonie, which in turn is seen as a key factor acting as a tailwind for the major. The U.S. Dollar, on the other hand, continues to struggle to make a meaningful recovery from its lowest level since September 1, which was hit in response to Tuesday’s weaker U.S. consumer inflation data, limiting gains for spot prices.
Data released by the Energy Information Agency on Wednesday showed that U.S. crude inventories rose by 3.6 million barrels last week, while production held steady at a record 13.2 million barrels per day. This raised concerns about weak demand in the world’s biggest oil consumer. In addition, China’s crude oil refinery throughput slowed 2.8% to 15.1 million barrels per day in October from a record high in September, pointing to slowing demand in the world’s second-largest economy. This, along with concerns that a deeper global economic downturn will dampen demand, is offsetting OPEC supply cuts and continuing to weigh on the commodity.
Meanwhile, weak US macro data released this week, including softer October CPI and PPI figures, reinforced the view that the Federal Reserve’s (Fed) tightening cycle is over. Moreover, bearish oil prices could have a disinflationary effect, which should bring the Fed closer to its 2% target and allow it to soften its hawkish stance. In fact, markets are starting to anticipate rate cuts, perhaps in the first half of 2024. The dovish outlook is dragging the benchmark 10-year US Treasury yield to a more than two-month low, which is keeping the USD under pressure and may limit the upside for the USD/CAD pair.
The aforementioned mixed fundamental backdrop warrants some caution before positioning for an extension of this week’s good bounce from the 50-day simple moving average (SMA) support. Nonetheless, spot prices appear to have reversed much of the weekly losses for the time being, as traders now look to U.S. housing data for fresh impetus. Traders will also be looking ahead to a scheduled speech by Chicago Fed President Austan Goolsbee, which along with US bond yields and overall risk sentiment, will drive demand for the safe-haven USD and create short-term opportunities for the USD/CAD pair.
Technical Outlook
From a technical perspective, this week’s bounce from the 50-day SMA support and subsequent move higher favors bullish traders. In addition, the oscillators on the daily chart have just begun to gain positive momentum, supporting the prospects for further near-term bullish movement. Nevertheless, it would be wise to wait for sustained strength and acceptance above the 1.3800 level before placing fresh bullish bets. The USD/CAD could then accelerate towards the next relevant hurdle in the 1.3870-1.3875 area, en route to 1.3900 or the highest level since May 2020, which was touched earlier this month.
On the other hand, the 1.3750-1.3745 area now appears to be protecting the immediate downside ahead of the 1.3700 round number and the 50-day SMA, currently around the 1.3660 region. A convincing break below the latter will act as a fresh trigger for bearish traders, and drag the USD/CAD back towards the monthly swing low around the 1.3630-1.3625 area, en route to the 1.3600 round figure.
