USD/CAD Rallies as Lower Oil and US PCE Watch Weigh on CAD

Key Moments

USD/CAD Supported by Dip-Buying as Loonie Softens

The USD/CAD pair is edging higher in Asian trading on Wednesday, drawing interest from buyers on dips as the Canadian Dollar comes under pressure. The advance, however, remains contained, with the pair still trading inside Tuesday’s range. Spot levels are holding around the mid-1.3800s as market participants wait for the release of the US Personal Consumption Expenditures (PCE) Price Index to provide a clearer catalyst.

The PCE data is seen as a crucial gauge of US inflation and is expected to offer further insight into the Federal Reserve’s potential policy trajectory. Any shift in expectations for future rate moves is likely to influence the US Dollar and, by extension, USD/CAD.

Fed Outlook, Bond Yields, and Diplomacy Hopes Weigh on the Dollar

For now, the fundamental backdrop is keeping the US Dollar on the defensive. Softer expectations for an imminent rate hike by the Federal Reserve, together with declining US bond yields, are limiting the greenback’s upside and acting as a drag on USD/CAD.

Tamer US inflation readings for July have dampened the case for near-term tightening and have nudged market expectations toward a policy hold at the Federal Reserve’s September 15-16 meeting. Adding to the pressure, a CNBC report on Monday indicated that the US Treasury could deploy nearly $1 trillion to support increased buybacks of longer-term bonds that were announced last week. This has contributed to a further pullback in US yields and has been weighing on the Dollar.

At the same time, hopes for progress on US-Iran diplomacy are influencing broader market sentiment. The United States has offered Iran sanctions relief and an end to the naval blockade in return for reopening the Strait of Hormuz and stopping attacks conducted by its regional proxies. Optimism that this could lead to a diplomatic solution to a six-month-old US-Iran war has pushed crude oil prices down to a two-week low.

Oil Decline and Trade Tensions Pressure the Canadian Dollar

The drop in oil prices is undermining the commodity-linked Canadian Dollar and providing some support to USD/CAD. The Loonie is facing further headwinds from the intensifying trade conflict between the United States and Canada.

In the latest move in the dispute, Canada has imposed new tariffs on US products in response to Washington’s decision to levy 50% tariffs on $20bn of Canadian goods. These developments are weighing on the domestic currency and adding to the cautious tone around CAD.

Even so, the combination of a softer US Dollar and lingering uncertainty over the broader macro backdrop is encouraging restraint. Market participants appear hesitant to aggressively extend the pair’s recent rebound from the 1.3730 area, which marked a three-month low reached last Friday.

USD/CAD Technical Picture: Bias Remains Bearish

From a technical standpoint, USD/CAD continues to exhibit a bearish tone in the near term. On the 4-hour chart, the pair is trading below the 100-period Simple Moving Average (SMA), which is located at 1.3912. This level is likely to remain a key resistance zone.

Traders may continue to view this moving average as a potential selling area unless spot prices can achieve a sustained break above it. A convincing move beyond the 100-period SMA would be needed to alleviate the current downside bias and signal the possibility of a more constructive phase for the pair.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Canadian Dollar: Key Drivers and Macro Sensitivities

The Canadian Dollar (CAD) is influenced by several core factors highlighted in the broader discussion. These include interest rate settings by the Bank of Canada (BoC), crude oil prices, overall economic conditions, inflation dynamics, and the country’s trade balance.

BoC policy decisions are central to CAD performance, as the central bank sets the benchmark lending rate that ripples through the financial system. The BoC aims to keep inflation within a 1-3% band by raising or lowering interest rates. Relatively higher interest rates are typically supportive for the Canadian Dollar. The BoC can also employ quantitative easing or tightening to adjust credit conditions, with easing generally viewed as negative for CAD and tightening as positive.

Oil remains a critical component for the currency, given its role as Canada’s largest export. Changes in oil prices can quickly influence CAD, with rising prices usually associated with currency strength due to increased demand for Canadian exports and a potentially more favorable trade balance. Conversely, falling oil prices, as seen currently, tend to weigh on the Loonie.

Inflation data also affects CAD because it shapes expectations for BoC policy. Higher inflation can prompt rate hikes as investors seek higher returns, boosting capital inflows and supporting the currency. Macroeconomic indicators such as GDP, Manufacturing and Services PMIs, labor market data, and consumer confidence readings additionally help define the outlook for the Canadian economy and the likely stance of the central bank.

Broader market sentiment plays an important role as well. In “risk-on” periods, when investors are more willing to seek higher-yielding assets, CAD can benefit. In contrast, “risk-off” episodes often lead to safe-haven flows away from the Canadian Dollar. Since the United States is Canada’s largest trading partner, the health of the US economy is also an essential factor influencing CAD performance.