- The USD/CAD crosses below the critical level of 1.4200, heading towards 1.4164 on a three-day consecutive basis due to the declining US dollar
- The drop in interest rates expectations and a geopolitical surge in the price of crude oil contribute to the Canadian dollar’s gains.
- The lingering concerns over divergent inflation trends and the delayed renewal of the Canada-United States-Mexico Agreement pose substantial counterparty risks in the long run
For much of the past week, USD/CAD had been stuck around the 1.4200 level, unable to decide on a direction. But that indecision’s now broken to the downside. The pair has spent three straight sessions, including today’s intraday trade, below that mark, dropping from the 1.4210-1.4220 area into the 1.4130s.
Anyone tracking the loonie has to wonder if this marks a true trend change, or just a pause in the dollar’s longer uptrend.
Shifting Central Bank Math and the Energy Boost
The USD/CAD pair had been trading in a relatively narrow range near 1.4200, reflecting a period where US dollar and Canadian loonie forces were balanced. Breaking below this mark is a technical move that might signal shifting momentum. Such moves often grab the attention of traders who watch key psychological levels. They can influence price action and where traders place their bets.
On one side, the US dollar has been weakening significantly this week. It kept falling even when US jobless claims came in better than expected, because people were paying more attention to the overall mood rather than just one piece of data.
Meanwhile, in Canada, the swap markets have quietly adjusted, now putting the chances of the Bank of Canada raising interest rates this year at about 60%, up from around 40% just a few days ago. This change is helping the Canadian dollar gain strength. Earlier this summer, market players were strongly expecting the US Federal Reserve to raise rates multiple times, especially with a new Fed Chairman, Kevin Warsh.
However, pricing for a cumulative Fed rate increase by December has dropped notably. It’s now around 26 basis points, down from the 38 basis points expected just last week. This cooling trend was reinforced by the latest Fed minutes. They showed that while inflation concerns remain, the broader enthusiasm for immediate, consecutive hikes has started to recede.
At the same time, the Canadian dollar, which is closely tied to commodities, is getting a significant boost from the global energy sector. New geopolitical tensions in the Middle East, with recent military clashes near important global shipping routes, have driven up international crude oil prices. Since Canada is a major exporter of crude oil, higher energy prices naturally benefit the Canadian dollar.
Navigating the 1.4100 Support Zone
With the USD/CAD pair breaking its multi-week trading range, currency allocators and macro investors should rethink their short-term positioning. Chasing this downward breakout with aggressive, large-scale short USD positions at current levels carries notable risks. The pair is quickly nearing its next major technical support zone around 1.4100.
There are also trade policy issues to keep an eye on. The failure to immediately renew the Canada-United States-Mexico Agreement (CUSMA) after its July deadline creates long-term structural uncertainty. Any strong protectionist talk or threats of tariffs from Washington would immediately dampen business confidence and slow down the Canadian dollar’s gains.
Shifting momentum from US dollar dynamics, commodity influences, and policy expectations favoured the Canadian dollar recently.
It signals potential bearish momentum for the pair, though sustainability depends on confirmation from economic data and volume.
They should consider favouring CAD strength with defined risk levels, while monitoring resistance for possible reversals.
