Mid-September lows in focus for Canadian Dollar against broadly softer USD ahead of US data

US election results put heavy pressure on the USD, drawing renewed selling in USD/CAD on Wednesday.
Lower US bond yields and prospects for diplomacy with Iran add to the safe-haven dollar’s weakness.
A hawkish BoC supports the Loonie, while traders await direction from US economic releases.

USD/CAD slips towards 1.3955 in early European trading. Renewed selling on Wednesday erases the modest gains recorded over the previous two days this week as the US Dollar (USD) weakens across the board. With fundamentals favouring further declines, the pair is approaching the one-and-a-half-month low reached last Friday.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Democratic majorities in both the House of Representatives and Senate following the US midterm elections sent the USD Index (DXY) to its lowest in over a month. The index measures the Greenback against a basket of currencies. Concerns that fiscal gridlock could constrain government spending and impede economic growth increased political uncertainty after the result. A rush into safe-haven government debt pushed US bond yields lower again, adding pressure on the dollar.

Prospects for diplomacy with Iran are also weighing on the Greenback. Speaking to the Financial Times on Tuesday, President Donald Trump said the US had no immediate plans to attack Iran. A senior Iranian official, meanwhile, told Reuters that reopening the Strait of Hormuz would require sanctions relief and an end to the US naval blockade. Iran's Islamic Revolutionary Guard Corps (IRGC) also reported that four tankers had been destroyed after hitting mines south of the Strait of Hormuz.

Crude oil prices continue to benefit from the geopolitical risk premium, supporting the commodity-linked Loonie. The Canadian Dollar (CAD) also draws support from last week’s hawkish rate increase by the Bank of Canada (BoC), its first since July 2023. Together, these factors strengthen the case for further USD/CAD declines. Expectations that the US Federal Reserve (Fed) will increase rates again in December could, however, discourage traders from positioning for larger USD losses.

The ADP private-sector employment report and ISM Services PMI form Wednesday’s US data agenda and could provide direction during the North American session. Friday’s closely watched monthly employment reports from the US and Canada remain the main focus, with implications for the near-term path of USD/CAD. In the meantime, the fundamental picture suggests that recovery attempts are more likely to attract selling.

USD/CAD: daily price chart

1.3947 Support: USD/CAD Technical Outlook

Holding above both the 200-day Simple Moving Average (SMA) at 1.3893, a pivotal support, and the 61.8% Fibonacci retracement at 1.3947 leaves USD/CAD with a modestly positive near-term bias. A decisive breach of the latter would, however, bring lower support into view at the 78.6% retracement around 1.3852, followed by the structural low near 1.3731. Further selling beyond those levels would materially weaken the bullish outlook.

Any advance first faces resistance at the 50.0% retracement near 1.4013. A stronger hurdle follows at the 38.2% level around 1.4080, with the 23.6% retracement at 1.4163 next, before the cycle high near 1.4296.

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

Canadian Dollar: Key Questions

Which factors matter most for the Canadian Dollar?

Interest rates set by the Bank of Canada (BoC), oil prices, economic conditions, inflation and the trade balance are the principal drivers of the Canadian Dollar (CAD). Oil is Canada’s largest export, while the trade balance measures the difference between the value of exports and imports. Investor appetite for risk also matters: demand for riskier assets, or risk-on sentiment, supports CAD, whereas risk-off sentiment reflects a preference for safe havens. Economic conditions in the US are another major influence, as it is Canada’s largest trading partner.

Through which channels does Bank of Canada policy affect CAD?

By setting the interest rate at which banks lend to each other, the Bank of Canada (BoC) shapes borrowing costs across the economy and exerts considerable influence on the Canadian Dollar. Its primary objective is to keep inflation within 1-3%, raising or lowering rates as needed. Relatively high interest rates generally support CAD. Credit conditions can also be adjusted through quantitative easing or quantitative tightening; easing tends to weaken CAD, while tightening tends to strengthen it.

Why are oil prices important for CAD?

As Canada’s largest export, petroleum gives oil prices a direct role in the Canadian Dollar’s valuation. Changes in oil prices therefore tend to feed through immediately to CAD. Rising oil prices generally lift the currency by increasing aggregate demand for it; falling prices usually have the reverse effect. More expensive oil also increases the likelihood of a trade surplus, providing further support for CAD.

Why can inflation figures move the Canadian Dollar?

Traditionally, inflation was viewed as harmful to a currency because it erodes the value of money. With cross-border capital controls having eased, however, the opposite relationship has prevailed in modern times. Higher inflation often prompts central banks to raise interest rates, drawing capital from international investors looking for attractive returns. The resulting inflows increase demand for the domestic currency, which in Canada is the Canadian Dollar.

What do economic releases mean for CAD?

GDP, manufacturing and services PMIs, employment figures and consumer sentiment surveys offer evidence of economic health and can shape the Canadian Dollar’s direction. A robust economy supports CAD by attracting foreign investment and potentially prompting the Bank of Canada to raise interest rates, strengthening the currency. Weak economic readings, by contrast, are likely to weigh on CAD.