- USD/CAD has advanced for five straight sessions despite oil near $100, as Fed hike bets, rising US Treasury yields near 5% and safe-haven demand from Middle East tensions outweigh traditional oil support CAD
- The upward momentum could be disrupted Federal Reserve sounds less hawkish, oil prices rise significantly, tensions in the Middle East ease, or if there are positive developments in trade talks between the US and Canada.
- Traders can position for ongoing dollar strength or potential reversals after the Fed's decision. Meanwhile, energy assets should benefit from high crude prices, no matter how currencies fluctuate in the short term.
The foreign exchange market isn’t following its usual historical patterns right now. Even as crude oil prices have rebounded sharply, the US dollar (USD) has strengthened for five consecutive days against the Canadian dollar (CAD).
West Texas Intermediate crude has climbed to $100 a barrel or higher, a level not seen since May. This jump is partly due to supply worries in the Middle East. Yet, this goes against the usual pattern because higher oil prices typically strengthen the Canadian dollar, a currency often tied to commodity prices. As of early European trading session, the USD/CAD pair had hit an intraday high of 1.3939, the highest in nearly four weeks.
Why the Dollar Is Outperforming
Several factors are contributing to the US dollar’s stronger performance. The market widely anticipates a 25-basis-point interest rate hike by the Federal Reserve at its upcoming meeting. This would be the first hike in over two years. Higher energy prices are also affecting what people expect inflation to do.
In August, US consumer prices went up 3.4% compared to last year, and prices for producers are also climbing. The interest you get on 10-year US Treasury bonds has gone above 5%, which is the highest it’s been since 2007. This rise widens the interest rate gap in favour of the US dollar.
Additionally, the continued climb in US Treasury yields makes dollar-denominated assets more appealing than Canadian government bonds. This yield difference pulls international investment toward the US dollar, overriding the advantages Canada gets from higher oil revenues. Geopolitical tensions also factor in.
Heightened tensions between the US and Iran, fighting near the Strait of Hormuz, and supply problems like a shut-down Saudi pipeline have both helped push up oil prices and the US dollar. At the same time, the Bank of Canada is likely to keep its interest rates as they are because core inflation is close to its 2% goal. This makes the US look better from a money policy perspective.
What Could Disrupt USD/CAD’s Upward Momentum?
A few developments could shift the USD/CAD pair’s current upward trend. The Federal Reserve’s upcoming decision and its statement will be central to this.
If the Fed takes a less aggressive stance, or if policymakers signal the energy price shock is temporary, that could temper rate hike expectations and ease pressure on US yields.
Also, if US inflation or job numbers come in weaker than expected, leading people to believe the Fed might cut rates again, the difference in yields would shrink and could slow down USD/CAD’s rise.
A bigger jump in oil prices, significantly improving Canada’s trade balance, would also strongly support the Canadian dollar. This holds especially true if Middle East supply risks grow without a corresponding rise in global risk aversion.
Conversely, if tensions ease significantly, lowering oil prices and cutting safe-haven demand, the effects might be mixed. However, a clear drop in yields would likely help the Canadian dollar.
Opportunities for Traders
This unusual market dynamic presents distinct opportunities. Traders betting on continued US dollar strength can watch Federal Reserve communications and yield trends for signs of more upside in USD/CAD. They’ll likely use resistance levels around 1.3930 as important reference points.
Meanwhile, those expecting a reversal might look for entry points during any post-Fed pullback, especially if oil prices stay high and support Canada’s economic fundamentals. Energy producers and related companies, of course, stand to gain from sustained high crude prices no matter what short-term currency shifts occur.
In the end, the Federal Reserve’s upcoming decision will likely determine if this trend continues or if energy prices and currency differences find a more balanced relationship.
The Federal Reserve’s September policy decision and statement will set the tone for rate expectations, Treasury yields, and the US dollar’s strength against the loonie.
As a major crude exporter, Canada’s currency usually strengthens when oil prices climb. That’s because energy exports boost the terms of trade and increase demand for the loonie.
Traders might prepare for the dollar to keep strengthening or for a reversal after the Fed meeting. Meanwhile, energy assets could gain from higher crude prices, regardless of how the currency shifts in the short term.