USD/CAD currency pair turn around on Monday continues to show negative bias for the second consecutive day. It continues to have a hard time staying above the important 1.4000 psychological barrier. With oil prices bouncing back, that has helped put some wind in the sails of the loonie. This creates upward pressure on the value of the Loonie. The index/ETF pair had done quite well in avoiding persistent, follow-through selling. Further, it has managed to remain above the 200-day Simple Moving Average (SMA) for all of the Asian session.
It could be an important few weeks USD/CAD traders. Last week they not only broke out through the 200-day SMA but through the all-important 1.4000 level—a significant breakthrough not seen since April. Spot USD/CAD prices are currently trading right around this psychological level. Even so, they still don’t stray too far from their recent extreme highs since April 10, which they hit last Friday.
Key Factors Influencing USD/CAD
Economic health of the U.S. economy is very important factor for performance of USD/CAD currency pair. This is due in no small part to Canada recently overtaking China as the United States’ largest trading partner. The largest driver has been economic indicators from the U.S. economy being mixed, leading to a confused market. Recent market chatter around potential U.S. Federal Reserve interest rate cuts next year have been putting USD bulls on the back foot. This extreme uncertainty is further complicating dynamics of the currency pair.
Further, the delaying shutdown of the U.S. government has added to this defensive USD bulls posture. Worries about the medium-term fiscal health of the U.S. economy might reduce demand for the dollar. That would change the fundamental value of the Peso revealed against the Loonie.
The Canadian dollar does best as a commodity-linked currency. This advantage arises from Canada’s extreme reliance on petroleum exports. Oil prices have started to rebound from a five-month low, starting the week with a bullish gap higher. Another factor that weighs heavily on the strength of the Canadian dollar is that crude oil prices continue to climb as well. Traders will be watching this sector intently for further developments.
Recent Economic Developments
The Canadian economy is still showing amazing resilience. We’ll take any rosy surprises like last week’s report showing an unexpected 60,400 job gain in September! The surprise employment report obviously is helping confidence in the Loonie come roaring back. As a consequence, it has appreciated against the U.S. dollar. Strong job growth is fueling optimism among analysts. Those rosy forecasts, they argue, will allow the Canadian economy to remain an outlier of stability and growth, providing additional support for the Loonie.
Back it up a second and recall that market liquidity has been extraordinarily thin. This is mainly because of a holiday being observed in both the U.S. and Canada. Investors and traders alike need to be extra careful with the decreased trading volume. This somewhat contradictory, mixed fundamental backdrop has the potential to spark greater turbulence.
Technical Analysis and Market Sentiment
The USD/CAD pair is now comfortably above the 200-day SMA, suggesting only very limited downside risk in the short run. This is particularly ascertained close to the very solid support zone near 1.3940-1.3935. If prices were to fall below this point, it could lead to additional downside selling pressure.
If USD/CAD bulls were to take back control and drive prices above 1.4000 convincingly, that may indicate more robust bullish sentiment is present. And market participants, including those at the Fed, will be keeping a keen eye on any changes in oil price dynamics. These shifts can have an immediate effect on the CAD’s value and overall market sentiment.