USD/CAD declines towards 1.3500 as USD Index drops further and oil rebounds

• USD/CAD is declining towards 1.3500 amid a weak USD Index and a recovery in the oil price.
• Investors are dumping the USD Index as the White House is struggling to raise the US debt ceiling.
• The Loonie will be on the tenterhooks ahead of the US/Canada Employment data.

The USD/CAD pair has witnessed an immense sell-off as the US Dollar Index (DXY) has extended its losses sharply and the oil price has shown a significant recovery. The Loonie asset is expected to extend its downside further toward the round-level support of 1.3500 amid a strengthening downside bias for the USD Index.

Investors are dumping the USD Index as the White House is struggling to raise the US debt ceiling. US President Joe Biden is least interested in US debt ceiling talks with Republicans if the approval of raising them comes at a cost of the President’s spending initiatives. A delay in the same is expected to cause severe loss of jobs and shrinkage in economic output due to failure in making obligated payments by the US Treasury.

Going forward, US Nonfarm Payrolls (NFP) data will remain in the spotlight. The US Employment data would be a base for the Federal Reserve’s (Fed) data-dependent approach as easing labor market conditions would be supportive of a neutral policy stance.

Also on the Canadian Dollar front, investors are awaiting the release of the Employment data. Net Change in Employment is seen declining to 20K vs. the prior release of 34.7K. The Unemployment Rate is expected to increase to 5.1% from the former release of 5.0%. Rising jobless numbers would allow the Bank of Canada (BoC) to retain its stance of unchanged monetary policy.

BoC Governor Tiff Macklem said in a prepared speech at the Toronto Region Board of Trade that the central bank is prepared for more rate hikes if inflation persists above the 2% target.

Meanwhile, the oil price has rebounded firmly above $69.00 on optimism that the Fed will pause its policy-tightening process to support the US economy from getting into recession. It is worth noting that Canada is the leading exporter of oil to the United States and higher oil prices will support the Canadian Dollar.