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USD/CAD Peaks at 1.3700, Reaching a High Since March Amidst Falling Oil Prices and a Strong USD

3 October 2023 Written by Stephane Dubois  Senior Market Analyst Stephane Dubois

The USD/CAD currency pair has seen significant momentum recently, marking its third consecutive day of gains on Tuesday. This surge comes after last week's robust recovery from a pivotal 200-day Simple Moving Average (SMA) support hovering around the 1.3400 territory. The pair has now reached its zenith since late March, enticing investors to look for sustained strength beyond the 1.3700 mark before venturing into new positions.

The robust performance of the US Dollar (USD) is noteworthy. It has rocketed to an impressive 10-month pinnacle, backed by the prevalent sentiment that the Federal Reserve (Fed) is poised to maintain its hawkish trajectory.

This stance is further reinforced by the latest string of robust US macroeconomic indicators. Adding more weight to this bullish outlook, Cleveland Fed President Loretta Mester's remarks cemented the market's belief that the US central bank might hold on to elevated interest rates for a prolonged duration. The yield on the pivotal 10-year US government bond has consequently reached a staggering 16-year high. These dynamics, in conjunction with a globally muted risk appetite, are amplifying the appeal of the US Dollar, regarded as a safe-haven currency, thereby propelling the USD/CAD pair.

Contrastingly, the Canadian Dollar (CAD) is grappling with challenges. Rising anticipations hint that the Bank of Canada (BoC) might have capped its interest rate hikes for now. Recent data from Statistics Canada divulged a stagnation in Canada's economic growth for July. Notably, the manufacturing sector witnessed its most substantial contraction in over two years during this period.

This, coupled with a 0.2% GDP shrinkage in June, has amplified speculations about the BoC maintaining the status quo on interest rates, even amidst persistent inflationary pressures. Furthermore, the Loonie, intrinsically tied to commodities, faces headwinds due to declining Crude Oil prices, bolstering the USD/CAD dynamic.

Oil prices have witnessed a pullback from their recent zenith, marking their fourth consecutive day of declines and touching a three-week trough. This downward trajectory is, in part, attributed to investors cashing in on their profits, spurred by apprehensions that rising US interest rates might negatively influence fuel demand. However, indicators of a constricted global supply could provide a buffer against a more substantial decline. In light of the present fundamentals, the environment is skewed in favor of the USD. The recent surge past the 1.3600 threshold further bolsters the case for a continued upward trajectory for the USD/CAD pair.

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