- USD/CAD gains ground to near 1.3995 in Friday’s early European session.
- The pair retains a positive outlook above the 100-day SMA, with bullish RSI momentum.
- The initial support level is seen at 1.3945; the first upside barrier emerges at 1.4080.
The USD/CAD pair trades in positive territory around 1.3995 during the early European trading hours on Friday. The US Dollar (USD) extends its rally against the Canadian Dollar (CAD) on a hawkish tone from the US Federal Reserve (Fed). Traders will take more cues from Fed Governor Michelle Bowman’s speech later on Friday.
The US central bank raised the interest rates by a quarter-percentage point at its September meeting on Wednesday and flagged more hikes in the coming months. Fed Chair Kevin Warsh joined a unanimous decision to lift interest rates, while officials validated a hawkish path and projected one more increase later this year. Hawkish stance from the Fed could provide some support to the Greenback against the CAD in the near term.
Meanwhile, ongoing tensions in the Middle East could boost crude oil prices and lift the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the CAD.
Iran's Islamic Revolutionary Guard Corps (IRGC) said on Thursday that a Togo-flagged oil tanker was struck while attempting to make an “illegal passage” through the Strait of Hormuz, Arab news reported. US President Donald Trump stated on Thursday that he was approaching a major decision on whether to resume large-scale attacks on Iran, as Washington weighs how to bring the months-long war to an end, according to Axios.
CAD underperforms as Fed–BoC gap widens and USD/CAD holds near 1.40
Strategists at Scotiabank note that the “CAD slide following the FOMC Wednesday has steadied in overnight trade,” but stress that the currency “has failed to improve, unlike most of its major currency peers, leaving it a clear underperformer on the session.” They point out that “with the Fed/BoC policy rate differential back to 175bps, where it spent much of last year, wider front-end spreads account for the CAD’s softness and underperformance.”
Scotiabank adds that its fair value framework shows “an equilibrium exchange rate of 1.3894, indicating that there is a degree of USD overvaluation in current spot rates but, with little prospect of that gap narrowing anytime soon, the CAD may find it hard to recover meaningfully for now.”
Technical Analysis: USD/CAD maintains a constructive outlook in the near term
In the daily chart, USD/CAD holds a bullish near-term bias as spot remains above the 100-day simple moving average (SMA) and is well supported by the Bollinger Bands (20) midline. Price is pressing against the upper Bollinger band, indicating a strong topside extension, while the Relative Strength Index (14) around 61 suggests firm but not yet overbought momentum that could allow the pair to probe higher while dips stay contained.
On the downside, the immediate support level is located at the 100-day SMA at 1.3945, with deeper demand seen at the Bollinger mid-band near 1.3872. The next contention level is seen at the lower band around 1.3750. As long as USD/CAD holds above the 100-day SMA, the technical tone favors further upside.
On the bright side, the August 5 high of 1.4080 acts as an immediate resistance level for the pair. Any follow-through buying above this level could pave the way to the July 7 high of 1.4226, en route to the June 24 high of 1.4248.
(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.
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.