USD/CAD weakens further below mid-1.3500s, refreshes multi-week low ahead of BoC

• USD/CAD dives to a three-week low amid the prevalent USD selling bias.
• Diminishing odds for more aggressive Fed rate hikes weigh on the buck.
• Subdued oil prices to undermine the loonie and limit losses ahead of BoC.

The USD/CAD pair remains under heavy selling pressure for the second straight day and drops to a three-week low during the first half of the European session on Wednesday. The downward trajectory drags spot prices to the 1.3530 area in the last hour and is exclusively sponsored by the heavily offered tone surrounding the US dollar.

In fact, the USD Index, which measures the greenback's performance against a basket of currencies, plummets to a one-month low amid diminishing odds for a more aggressive policy tightening by the Fed. The recent US macro data pointed to signs of a slowdown in the world's largest economy and might force the US central bank to soften its hawkish stance. This is evident from a further decline in the US Treasury bond yields, which, in turn, continues to weigh on the buck and exert some follow-through downward pressure on the USD/CAD pair.

With the latest leg down, spot prices confirm a fresh bearish breakdown below the 1.3600 mark and seem vulnerable to sliding further. That said, subdued crude oil prices could undermine the commodity-linked loonie and help limit losses for the USD/CAD pair. The American Petroleum Institute (API) reported on Tuesday that US crude inventories grew more than anticipated, by 4.5 million barrels in the week of October 21. This, along with worries that a deeper economic downturn will dent fuel demand, act as a headwind for black liquid.

The mixed fundamental backdrop warrants some caution before positioning for a further depreciating move. Traders might also prefer to move to the sidelines ahead of the Bank of Canada monetary policy decision, due to be announced later during the early North American session. The Canadian central bank is expected to hike interest rates by 75bps. Hence, the focus will be on the accompanying policy statement and the post-meeting press conference.

Investors will look for clues if the BoC will shrug off the looming recession risk and continue with its aggressive policy tightening path or signal a dovish tilt. This, in turn, will play a key role in influencing the Canadian dollar and provide some meaningful impetus to the USD/CAD pair. The market attention will then turn to important US macro releases, including the Advance GDP report for the September quarter, on Thursday.

Technical levels to watch