USD/CAD is gaining momentum, approaching 1.4280 during the early European session on Monday. Traders have reduced their positions on Federal Reserve interest rate increases following disappointing employment figures. The pair maintains a bullish sentiment; however, a temporary sell-off cannot be dismissed given the overbought conditions. The USD/CAD pair strengthens to approximately 1.4280 during the early European trading hours on Monday. Oil prices have declined due to increasing crude exports from the Middle East and the release of oil by G7 nations, contributing to a surplus in supplies. This situation is exerting downward pressure on the commodity-linked Canadian Dollar against the US Dollar. It is important to recognise that Canada stands as a significant player in the oil export market, and typically, declining crude oil prices exert a detrimental effect on the value of the Loonie. However, recent soft US jobs data significantly diminished expectations for a Federal Reserve rate hike in October. This, in turn, could undermine the currency. Data released by the US Bureau of Labour Statistics on Friday indicated that US non-farm payrolls increased by 29,000 in September, compared to a revised increase of 133,000 in August, down from the previously reported 162,000. This figure fell short of the market expectation of 90K.
Traders currently assign a probability of approximately 22.1% to a US rate hike this month, a notable decrease from around 70% earlier in the week, according to the CME FedWatch Tool. According to TD Securities, “the wheels fell off the bus in rates this week,” with the Canadian mid-curve under heavy pressure as the “10-year peaked back above 4% and 2s10s steepened back out to early-September levels.” Analysts highlight that “cross-market and outright moves continue to diverge, as 10s sit near a 2-year high and CAN-US 10s hit a 1-year low,” underscoring the extent of the recent dislocation. They also point to a notable shift in the long-end, where “10s30s saw a meaningful move steeper from very flat levels, with 10s underperforming the front-end but outperforming the move in duration.” Despite the sharp repricing, TD Securities stresses that “while the belly of the curve is at elevated levels relative to recent history, we see yields moderating into year-end by 10-15 bps.” In their view, “cross-market moves should be the focus in duration this week, with a 6bps move tighter by the end of the week,” as relative performance between Canada and the US becomes increasingly important for positioning along the 10- to 50-year sector.
Fed’s Logan delivers a notably more hawkish message, with a 9.2/10 FXS Speechtracker score standing well above the 8.1/10 historical average, underscoring a stronger tightening bias relative to the established baseline. The assertion that elevated yields could indicate heightened term premiums, possibly diminishing the necessity for further tightening, contrasts with clear demands for multiple additional rate hikes and a policy rate elevation of 50 bps or greater. This dynamic reinforces a narrative of ongoing restrictive intentions aimed at achieving the 2% inflation target, thereby bolstering support for the Dollar. The FXS Fed Sentiment Index has increased by 1.68 points to 136.59, remaining in hawkish territory and indicating a distinct shift toward heightened tightening expectations in the wake of Logan’s comments. This elevated index level, significantly surpassing the neutral 100 mark, confirms that the latest speech meaningfully amplifies perceived Fed resolve in comparison to the established baseline captured by the FXS Speechtracker.
In the daily chart, USD/CAD continues its upward trajectory, surpassing the 100-day simple moving average and the 20-day Bollinger middle band, which collectively support a distinct bullish near-term outlook. Price is currently approaching the upper Bollinger band at 1.4352, while the Relative Strength Index (14) at 79.3 indicates a position firmly within overbought territory. This scenario suggests that while the upside remains strong, it is becoming increasingly susceptible to a corrective pullback rather than a new impulsive move upward. On the topside, immediate resistance is situated at the 20-day Bollinger upper band around 1.4350, where any rejection may instigate a pause or consolidation in the uptrend. Any follow-through buying above this level could pave the way to the April 1 high of 1.4415, en route to the March 3 high of 1.4542. On the downside, initial support is observed at the October 1 low of 1.4221, succeeded by the July 28 high of 1.4129 and the Bollinger middle band approximately at 1.4045. The critical contention level to monitor is the 1.4000 mark, which signifies both the 100-day simple moving average and a significant psychological threshold.
