USD/CAD trades with modest losses below 1.3500 as Oil prices surge to over one-year high

• USD/CAD drifts lower for the second straight day and retreats further from over a one-week high.
• Bullish Oil prices continue to underpin the Loonie and exert pressure amid subdued USD demand.
• The Fed’s hawkish outlook should act as a tailwind for the buck and help limit losses for the major.

The USD/CAD pair extends the overnight retracement slide from the vicinity of mid-1.3500s, or a one-and-half-week high and remains under some selling pressure for the second successive day on Thursday. The steady descent drags spot prices further below the 1.3500 psychological mark during the Asian session and is sponsored by surging Crude Oil prices.

In fact, Oil prices jump to over a one-year high on continued signs of tighter global supply and some optimism over an economic recovery in China – the world’s largest oil importer. US crude inventories shrank by a bigger-than-expected 2.2 million barrels (mb) in the week to September 22, marking the fifth week of draws in the previous seven. This, in turn, outweighs worries about economic headwinds stemming from rapidly rising borrowing costs and continues to act as a tailwind for the black liquid, which, in turn, is seen underpinning the commodity-linked Loonie and weighing on the USD/CAD pair.

The US Dollar (USD), on the other hand, consolidates its recent strong gains to the highest level since November 2022 and does little to influence the USD/CAD pair. Any meaningful USD corrective slide, however, still seems elusive in the wake of firming expectations for further policy tightening by the Federal Reserve (Fed). Investors now seem convinced that the Fed will keep rates higher for longer and have been pricing in the possibility of at least one more lift-off by the end of this year. The bets were reaffirmed by the overnight hawkish comments by Minneapolis Fed President Neel Kashkari.

It is not clear yet whether the central bank is finished raising rates amid ample evidence of ongoing economic strength, Kashkari noted. Adding to this, the better-than-expected release of the US Durable Goods Orders raised hopes for a stronger third-quarter GDP growth, which should allow the Fed to stick to its hawkish stance. This led to an extended selloff in the US fixed-income market, pushing the yield on the benchmark 10-year US government bond to a fresh 16-year peak, further beyond the 4.50% threshold, and should continue to act as a tailwind for the Greenback.

The aforementioned fundamental backdrop makes it prudent to wait for strong follow-through selling before positioning for any further depreciating move for the USD/CAD pair. Traders now look to the release of the final US Q2 GDP print, due later during the early North American session, which, along with the US bond yields, will drive the USD demand. Apart from this, Oil price dynamics provide some impetus to the USD/CAD pair and allow traders to grab short-term opportunities.

Technical levels to watch