Insights 
VT 
The Canadian Dollar experienced a three-day slump against the US Dollar, with the USD/CAD pair reaching the 1.4050 region. This downturn follows the Bank of Canada’s recent 25-basis point rate cut, aligning with the Federal Reserve’s similar move. Canada’s reliance on Crude Oil and the ongoing trade war have also pressured the Loonie, contributing to its lacklustre performance.
Recent data indicates a 0.3% decline for the Canadian Dollar against the US Dollar. Standard & Poor’s Canadian Manufacturing PMI suggests improved business conditions, though overall projections remain negative due to persistent trade tariffs. Price action for USD/CAD has moved above key exponential moving averages, hinting at a potential trend reversal. Bids face resistance between 1.4050 and 1.4100, with a move above this potentially leading to levels around 1.4300.
Factors Influencing the Canadian Dollar
Factors influencing the Canadian Dollar include Bank of Canada’s rate settings, Oil prices, economic health, and inflation. Interest rate changes impact the currency’s value, with higher rates generally being favourable. Oil prices closely affect the Canadian Dollar due to its status as Canada’s major export. Economic indicators such as GDP and PMI also play a role, indicating the economy’s health and influencing potential capital inflows.
Given the Canadian Dollar’s weakness, we are seeing the USD/CAD pair push back towards the 1.4050 level. Both the Bank of Canada and the Federal Reserve cut rates by a quarter-point last week, neutralizing the interest rate differential. This forces our attention onto the underlying weakness in the Canadian economy and commodity prices.
The economic outlook is a primary concern, as business expectations remain contractionary. Recent data confirms this, with the S&P Global Canada Manufacturing PMI for October dipping to 49.8, signaling a slight deterioration in business conditions. This supports the view that ongoing trade tariff pressures are weighing on the economy’s performance.
Crude oil, a key driver for the Loonie, is offering little support. Even with West Texas Intermediate (WTI) crude prices hovering around $78 per barrel, this is not enough to generate strong momentum for the Canadian economy. These price levels struggle to incentivize major new investment in Canadian oil production, which historically requires higher sustained prices to drive significant economic growth.
Technical Analysis and Market Strategy
From a technical standpoint, the formation of a ‘golden cross’ on the daily charts, where the 50-day moving average crosses above the 200-day average, suggests a bullish trend is forming for USD/CAD. Derivative traders should consider positioning for a potential breakout above the 1.4100 resistance zone. Buying call options with strike prices near 1.4200 could be a viable strategy to capitalize on continued upward momentum.
We must remember the pair has seen higher levels before, such as the peak near 1.46 we saw back in March of 2020 during that period of market stress. A decisive break above 1.4100 could easily open a path toward the 1.4300 mark mentioned as the next target. This historical context makes a significant move higher seem entirely plausible.
However, a failure to break through the current resistance could see the pair fall back to test support around the 1.3900 level. To manage risk, traders with bullish positions might consider purchasing put options with a strike price below 1.3850. This can serve as a hedge against a sudden reversal if buying momentum fades.
