Canadian Dollar outperforms US Dollar as geopolitical tensions boost Oil

USD/CAD falls 0.24% on Monday and trades around 1.3870 at the time of writing, after reaching its highest level in more than two weeks earlier. The pair comes under pressure from both a stronger Canadian Dollar (CAD), supported by rising Oil prices, and a modest pullback in the US Dollar (USD).

Oil prices advance as tensions between the United States (US) and Iran intensify. US forces struck two rocket launchers on Iran’s Larak Island in the Strait of Hormuz on Sunday, prompting Tehran to retaliate with ballistic missiles targeting two US bases in Jordan.

US Treasury Secretary Scott Bessent also said that new secondary sanctions could be announced on a weekly basis to increase pressure on Iran. The geopolitical escalation fuels concerns over energy supplies and supports Oil prices, benefiting the Canadian Dollar given Canada’s role as a major Oil producer and exporter.

Meanwhile, the US Dollar gives back some of Friday’s strong gains, adding downward pressure on USD/CAD. However, the Greenback’s decline remains limited by renewed expectations of monetary tightening from the Federal Reserve (Fed).

Fed Chair Kevin Warsh said at the central bank’s annual symposium in Jackson Hole that interest rates may need to rise if progress in easing inflationary pressures remains insufficient. Higher energy prices also add to inflation risks and reinforce expectations of a potential rate hike as soon as September, providing some support to the US Dollar.

On the Canadian side, intensifying trade tensions between the United States and Canada could nevertheless limit the Canadian Dollar’s appreciation and prevent a more pronounced decline in USD/CAD.

Investors now turn their attention to the Bank of Canada (BoC) monetary policy decision on Wednesday. The monthly employment reports from the US and Canada, due on Friday, should then provide further clues about the economic and monetary policy outlook in both countries.

Canadian Dollar holds near fair value as BoC and jobs data come into focus

Strategists at Scotiabank note that the Canadian Dollar is steady, with the CAD “little changed on the session” and spot having “spent the past week trading at or a little below our estimated fair value.” They add that the currency “continues to outperform, if only modestly, against that benchmark this morning.”

Scotiabank reports that “our fundamental equilibrium estimate has nudged a little higher since Friday to 1.3920, reflecting wider front-end US/Canada swap spreads in the main.” In their view, “CAD resilience in the face of volatile Fed expectations and the latest round of trade uncertainty is impressive and reaffirms our view that there is limited downside potential in the CAD currently.” However, they caution that “equally, however, scope for gains is curtailed by the wide rate gap.”

Looking ahead, the bank highlights that “the Canadian calendar is relatively busy this week.” They expect Wednesday’s BoC policy decision “is not expected to reflect any change in policy or indeed in the Bank’s cautious view of the outlook,” while Friday’s jobs report “is expected to reflect a moderate gain in employment (15k) after the solid July report.”

USD/CAD technical analysis

In the one-hour chart, USD/CAD trades at 1.3871, holding a mildly bullish intraday bias as it remains above the 100-period simple moving average (SMA) at 1.3869 and the 200-period SMA at 1.3838. The pair is consolidating after failing to extend gains through nearby horizontal resistance at 1.3910, while the Relative Strength Index (RSI) around 38 suggests fading bullish momentum and warns that the upside impulse is losing strength.

On the topside, initial resistance is located at 1.3910, with a subsequent barrier at 1.3958, where further buying could stall. On the downside, immediate support is found at the 100-period SMA at 1.3869, followed by the horizontal floor at 1.3845 and then the 200-period SMA at 1.3838, which together define the key area that bulls would need to defend to prevent a deeper corrective slide.