USD/CAD Rallies as Soft Oil, Rate Bets Weigh on Loonie

Key Moments

Oil-Driven Pressure on the Canadian Dollar

USD/CAD is advancing toward 1.4275 during early European trading on Tuesday as the Canadian Dollar loses ground against the US Dollar. The move reflects renewed pressure on the commodity-linked CAD, with weaker crude prices undermining sentiment. Market participants are also awaiting Canada’s Ivey Purchasing Managers Index (PMI), which is scheduled for release later on Tuesday.

Crude prices have come under pressure after the Group of Seven (G7) nations agreed on Friday to release 100 million barrels of diesel and crude from emergency reserves. The G7 also pledged to avoid energy export restrictions following pressure from US President Donald Trump.

Data released on Monday showed that the additional supply will add to Middle Eastern crude exports, which exceeded pre-war levels in four of the seven days in the final week of September. Canada is a major exporter of oil, and lower crude prices generally tend to weigh on the Loonie.

Fed Rate Expectations Ease After Soft US Labor Data

On the US side, reduced expectations for a Federal Reserve rate increase this month are acting as a potential drag on the Greenback. The US Bureau of Labor Statistics reported on Friday that Nonfarm Payrolls rose by 29K in September, down sharply from 133K previously and below the market forecast of 90K. The Unemployment Rate increased to 4.2% in September from 4.1% in August.

According to the CME FedWatch tool, markets are currently assigning roughly a 22.7% probability that the Fed will raise its benchmark rate at the October policy meeting.

Canada Labor Data in Focus as BoC Pricing Questioned

Strategists at Brown Brothers Harriman highlight that attention is turning to Canada’s September labor force survey, due on Friday. They note that the economy is expected to add “just +5.0k jobs after losing -41.7k jobs in August.” The strategists also state that the “unemployment rate is seen rising 0.1ppt to 6.5% on an unchanged participation rate of 65.0%, pointing to weak labor demand,” signaling persistent softness in the labor market.

Within this context, Brown Brothers Harriman argues that “BoC rate hike pricing (100bps in the next twelve months) looks too aggressive and leaves CAD vulnerable to a dovish repricing.” The firm emphasizes that “Canada core inflation is near the banks’ 2% target and indicators point to continued excess supply in the economy,” indicating limited support for such an assertive tightening trajectory and highlighting the risk of further Canadian Dollar weakness if expectations are adjusted lower.

Logan’s Hawkish Tone Supports the Dollar

Fed policy expectations have also been influenced by a notably hawkish speech from Fed’s Logan. The remarks registered a 9.2/10 FXS Speechtracker score versus a baseline of 8.1/10, signaling a stronger preference for tighter policy. Logan underscored that higher yields reflect both increased term premiums and expectations of higher interest rates, and emphasized calls for at least 50 bps of additional rate hikes and several more moves. This stance points to a policy bias favoring further tightening, even while acknowledging uncertainty around the eventual terminal rate.

The combination of stronger economic expansion, what is described as a well-balanced labor market, and a renewed emphasis on the need to “revive price stability” supports a policy approach that is modestly tight but skewed toward more hikes. Such a backdrop is generally supportive of the US Dollar and unfavorable for currencies like the Euro and Yen.

The FXS Fed Sentiment Index has risen by 1.68 points to 136.59, signaling a deeper move into hawkish territory well above the neutral 100 level and consistent with the elevated FXS Speechtracker reading. This move reflects markets absorbing Logan’s message that without higher rates, inflation will not return to the Fed’s 2% objective, reinforcing expectations for a prolonged period of restrictive policy.

USD/CAD Technical Picture: Bullish but Overbought

From a technical perspective, USD/CAD maintains a constructive tone on the daily chart. The pair is trading well above both the 20-day simple moving average (SMA) and the 100-day SMA, reinforcing a bullish near-term bias. Price action is pressing into the upper band of the Bollinger envelope, while the 14-day Relative Strength Index at 78.8 indicates overbought conditions and suggests that upside momentum may be stretched at current levels.

On the downside, initial support lies near the Bollinger middle band around 1.4070, followed by the 100-day SMA at 1.4005. A more pronounced pullback into this region would likely draw fresh buying interest within the prevailing uptrend. Further down, the lower Bollinger band at 1.3775 represents a more distant structural support area. On the topside, immediate resistance is located at the Bollinger upper band near 1.4365; a clear break above this level would pave the way for an extension of the recent bullish phase, although the overbought signals increase the risk of consolidation or a corrective pause before any sustained move higher.