The USD/CAD currency pair is still enjoying downward momentum, floating lower for the second day in a row. The US Dollar (USD) is slipping under the weight of bearish sentiment. This change comes on the heels of last week’s release of US Consumer Price Index (CPI) data that has spooked investors. From my perspective, market participants are reacting to mixed economic indicators. Consequently, the USD/CAD space has shown further clear selling after bouncing off the crucial 1.3800 psychological handle.
The USD/CAD cross is now on an inevitable path towards 1.3600, 1.3800 and beyond. This latest move takes it very close to this year-to-date low of about 1.3540, achieved all the way back in June. Traders now meet first resistance immediately at the 1.3780-1.3785 area. This is the region that has proven to be a key obstacle to clear prior to approaching the key psychological 1.3800 figure.
There are three key reasons that have contributed to the recent strength in USD/CAD. Most significantly, there was a quick overnight breakdown on attempts to hold momentum over the 100-day Simple Moving Average (SMA). This important 50 week moving average, which is right at the 1.3815 level, has served as a ceiling for aggressive buyers. The failure to get above this level has been a boon to bears’ conviction, thus causing the present price descent as well.
Analysts expect that a new round of short-covering in the market could send the USD/CAD pair back toward the 1.3875-1.3880 area. As this region is considered the monthly high tide, they have been particularly vulnerable to rising seas. If buyers make enough follow-through to drive prices above the 1.3900 level, the mood will change in favor of aggressive bullish traders. This momentum is likely to push USD/CAD spot prices up towards the 1.3950 region and possibly test the important 1.4000 psychological level.
There are signs that USD/CAD may be set for further weakness, particularly if prices fall back under the 1.3700 level. A move below this line could lead to a retest of the next major support level found in the mid-1.3600s.
The only constant is the expectations about upcoming transitions in monetary policy from the US Federal Reserve (Fed). Economists are expecting the Fed to cut borrowing costs by 25 basis points in September. They are anticipating at least two additional interest rate cuts between now and year’s end. These steps might have the effect of further depressing the value of the USD and adding volatility to other currency pairs, including USD/CAD.
In addition, trade-related uncertainties are putting pressure on the CAD. Recently, China announced a preliminary anti-dumping duty of 75.8% on Canadian canola imports, which can significantly impact Canada’s agricultural exports and may consequently influence CAD’s strength against USD.
US President Donald Trump has attracted attention and outrage for increasing tariff rates on our neighbor to the north, Canada. He then raised them from 25% to 35%, further complicating the already murky waters. These moves could help create a fraught trade atmosphere, eroding investor confidence in CAD even while bolstering bullish USD/CAD potential.
All of the main economic indicators coming out of Canada point to one thing—up. The CPI core CPI measure has risen to a year-over-year rate of 3.1%, up from 2.9% in June. By limiting the potential of the Canadian economy, inflationary pressure can be a burden. Consequently, it may temper the hawkish view on the CAD, providing a tailwind to the USD/CAD cross while traders assess evolving economic fundamentals.
Daily chart using technical analysis’s oscillator indicators shows a critical picture. Should USD/CAD keep falling, it risks meeting heavy support at the 1.3740 level. This second level can serve as a damper to prevent additional losses. This wild… It makes a great opportunity for traders looking to establish new potential buying positions, even while the entire market remains largely bearish.