• USD/CAD may rebound toward the nearly 18-month high of 1.4262.
• The 14-day Relative Strength Index near 74 signals overbought conditions.
• The primary support lies at the nine-day EMA of 1.4157.

USD/CAD loses ground for the second successive day, trading around 1.4210 during Asian hours on Friday. The technical analysis of the daily chart indicates that the price is positioned slightly below the top trendline of an ascending channel, suggesting a persistent bullish bias.

The USD/CAD pair is maintaining a bullish near-term bias as spot holds above both the nine- and 50-day Exponential Moving Averages (EMAs). The alignment of price over these trend gauges suggests underlying demand, although the 14-day Relative Strength Index (RSI) hovering in overbought territory near 74 hints that upside momentum may be stretched in the short run.

The USD/CAD pair may rebound and test the nearly 18-month high of 1.4262, recorded on October 1, followed by the top trendline of the ascending channel around 1.4270. A successful break above the channel would reinforce the bullish bias and support the pair to test the psychological level of 1.4300.

On the downside, the primary support lies at the nine-day EMA of 1.4157. A break below the short-term price average would weaken the bullish bias and put downward pressure on the USD/CAD pair to navigate the region around the bottom trendline of the ascending channel around the 50-day EMA of 1.4000.

Canadian dollar faces headwinds as US-Canada yield gap widens

Analysts at Scotiabank stress that “the outlook for relative central bank policy remains a dominant driver,” with the “continued widening in US-Canada yield spreads” presenting “a meaningful headwind for the CAD.” In their view, the growing policy divergence between the Fed and the BoC is increasingly weighing on the Canadian dollar’s performance against the USD.

Logan’s hawkish tilt lifts Fed sentiment, supports Dollar upside

Fed’s Logan delivered a notably more hawkish message, with a FXS Speechtracker score of 9.2/10 compared to the established baseline of 8.1/10, underscoring a stronger conviction that policy must tighten further. The emphasis that higher yields may reflect increased term premiums, potentially reducing the need for additional tightening, sits in tension with the assertion that policy is not yet restrictive and that at least 50 bps more in rate hikes are needed to revive price stability and secure the 2% inflation target. Overall, the speech signals a Fed willing to lean into further tightening despite balanced labor conditions and strengthening economic expansion, a backdrop typically supportive for the Dollar and a headwind for risk-sensitive FX.

The FXS Fed Sentiment Index rose by 1.68 points to 136.59, reinforcing that the Fed narrative remains firmly in hawkish territory well above the neutral 100 threshold. This upward move in the FXS Fed Sentiment Index, aligned with the elevated FXS Speechtracker score, points to growing market expectations of additional rate hikes, which should underpin the Dollar while keeping pressure on Euro and Yen crosses.

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

Canadian Dollar FAQs

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.