Canadian Dollar holds near 16 September high as USD stays weak and oil prices remain bullish

• USD/CAD falls for a third consecutive day as several factors weigh on the pair.
• Lower US bond yields and prospects for Middle East diplomacy put pressure on the safe-haven USD.
• Firm oil prices and a hawkish turn by the BoC support the Loonie, adding to the pair’s losses.

A new low since 16 September marked Friday’s Asian session for USD/CAD, as broad US Dollar (USD) weakness brought a third consecutive day of selling. A slight retreat in crude oil prices has nevertheless limited gains in the commodity-linked Loonie, allowing spot prices to recover a few pips from around the mid-1.3900s. The pair is still heading for a third successive weekly decline.

Falling US bond yields and hopes that diplomacy could end the conflicts in the Middle East have extended the USD’s corrective decline into a third consecutive day. In an effort to resume peace talks, US Vice President JD Vance sent a letter directly to Mohsen Rezaei, secretary of Iran's Supreme National Security Council. Qatar also submitted a fresh draft peace agreement to Iran. At the same time, disappointing technology earnings prompted a rush into safe-haven government bonds, as investors questioned whether increasing AI expenditure may generate sufficient returns. The resulting pressure on the dollar is also weighing on USD/CAD.

Escalating hostilities between Saudi Arabia and the Iran-backed Houthi group, however, continue to leave investors cautious. The geopolitical risk premium also persists as the US and Israel threaten to resume attacks after the US midterm elections. Meanwhile, expectations of a hawkish Federal Reserve (Fed) are drawing some buyers to the safe-haven USD near its weekly low. Thursday’s US economic releases, which indicated continued economic resilience and persistent price pressures, reinforced traders’ conviction that the US central bank will increase borrowing costs in December.

Elevated crude oil prices also pose an inflation risk, strengthening the case for further policy tightening by the Fed. Meanwhile, the Canadian Dollar (USD) appears to have limited scope to weaken, supported by the Bank of Canada's (BoC) sudden turn towards monetary tightening after its first rate increase since July 2023 earlier on Wednesday. This could discourage traders from taking bullish positions in USD/CAD, suggesting caution before positioning for a substantial recovery. Attention now turns to Canada’s monthly GDP release and speeches by influential FOMC members for fresh direction.

USD/CAD price action on the 4-hour chart

Technical Outlook Remains Bearish

The recent break below the psychological 1.4000 level, followed by acceptance beneath it, leaves USD/CAD with a bearish short-term outlook. On the 4-hour chart, spot prices also trade well below the 200-period Simple Moving Average (SMA). Rallies are therefore likely to remain limited as long as the pair consolidates below this structural barrier.

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