USD/CAD climbs to 1.3700 neighbourhood, highest since March on sliding Oil prices/bullish USD

• USD/CAD gains traction for the third straight day and climbs to a fresh multi-month top.
• Retreating Oil prices undermines the Loonie and remains supportive amid a bullish USD.
• The divergent Fed-BoC expectations support prospects for a further appreciating move.

The USD/CAD pair builds on last week's solid bounce from the vicinity of the very important 200-day Simple Moving (SMA) support near the 1.3400 mark and scales higher for the third successive day on Tuesday. Spot prices climb to the highest level since late March during the Asian session, with bulls now awaiting some follow-through strength beyond the 1.3700 round figure before placing fresh bets.

The US Dollar (USD) advances to a fresh 10-month high in the wake of growing acceptance that the Federal Reserve (Fed) will stick to its hawkish stance, bolstered by the incoming resilient US macro data. Adding to this, comments by Cleveland Fed President Loretta Mester reaffirmed market bets that the US central bank will keep interest rates higher for longer. This, in turn, pushes the yield on the benchmark 10-year US government bond to a 16-year peak, which, along with a generally weaker risk tone, continues to benefit the safe-haven Greenback and acts as a tailwind for the USD/CAD pair.

The Canadian Dollar (CAD), on the other hand, is weighed down by firming expectations that the Bank of Canada (BoC) is finished hiking interest rates. Statistics Canada reported on Friday that Canada's economic growth stalled in July as the manufacturing sector posted its biggest decline in more than two years. This comes on top of a 0.2% GDP contraction in June and fueled speculations that the BoC will keep interest rates on hold despite sticky inflation. This, along with a further pullback in Crude Oil prices, undermines the commodity-linked Loonie and lends support to the USD/CAD pair.

Oil prices extend the recent retracement slide from over a one-year top and continue losing ground for the fourth straight day, hitting a three-week low. The ongoing downfall could be attributed to some profit-taking in the wake of concerns that economic headwinds stemming from higher interest rates in the US will dent fuel demand. That said, signs of a tight global supply should help limit the downside. Nevertheless, the fundamental backdrop favours the USD bulls, which, along with the overnight breakout through the 1.3600 mark, support prospects for a further appreciating move for the USD/CAD pair.

Technical levels to watch