Canadian Dollar weakens versus USD on lower interest rate expectations

• Canadian Dollar loses ground as higher interest rates in the US and expectations of more hikes favor the US Dollar.  

• A triennial OPEC conference of Oil bigwigs gets underway though media coverage is limited. 

• The longer-term uptrend may be experiencing the start of a new upcycle if the daily highs can be held.  

Canadian Dollar (CAD) is weakening versus the US Dollar (USD) on Wednesday, depressed by the view that interest rates will rise further in the US compared to Canada. 

According to predictions from Trading Economics, base interest rates – set by each nation's central banks – are likely to rise by 0.25% in Canada compared to 0.50% in its Southern neighbor. Since relatively higher interest rates attract greater capital inflows, USD is set to benefit more than CAD. 

A major Organization of the Petroleum Exporting Countries (OPEC) conference is underway, which could affect Oil prices, whilst Crude traders will also be keenly awaiting American Petroleum Institute (API) data. Both could impact the Canadian Dollar (CAD). 

USD/CAD is trading in the upper 1.32s on Wednesday during the US session.  

Canadian Dollar news and market movers 

• The Canadian Dollar (CAD) is falling versus the US Dollar (USD) on the back of predictions of greater interest rate hikes in the US compared to Canada. 

• The US Federal Reserve (Fed) has already raised its base lending rate, the Fed Funds Rate, to a higher level of 5.25%, compared to the Bank of Canada’s (BoC) Policy Interest Rate of 4.75%.

• According to Trading Economics, the Fed is expected to hike rates by 0.25% in both Q3 and Q4 before peak rate is reached. This compares with only one 0.25% hike in Q3 in the case of the BoC.

• US Treasury Bond yields, the return investors can expect from holding bonds, are generally higher than their Canadian counterparts, further drawing investor capital and supporting the currency. The benchmark 10-year US Treasury Bond yield is at 3.859% compared to the 10-year Canadian Government Bond’s 3.352%. 

• Both countries’ yield curves are showing inversion, suggesting rates will peak in the near-term before falling, which is in line with Trading Economics’ forecasts. Yield curve inversion is also potentially a warning of impending recession.

• OPEC’s triennial get-together, the 8th International Seminar, is underway in Vienna and will last till the end of July 6. Oil Ministers from member states will meet other key players in the field of global energy. Reporters’ access to the event has been limited, but there is a possibility of news leaks impacting Oil prices and therefore CAD, since Crude is Canada’s largest export. 

• The most recent issue to have come under the spotlight for the Oil market is concern regarding Saudi and Russian supply, so any news regarding this could impact markets. 

• Weekly inventory figures from the American Petroleum Institute (API) are scheduled for release at 14:30 GMT and may impact Oil prices and therefore USD/CAD if they show an unexpected change in inventories. 

Canadian Dollar Technical Analysis: Signs of a reversal in line with longer-term uptrend

USD/CAD has been in a long-term uptrend on the weekly chart since the 2021 lows. Since October 2022, it has been in a sideways consolidation within the uptrend and currently sits at the bottom of that range. Given that the trend has a tendency to extend, the probabilities overall favor longs over shorts.

The USD/CAD appears to have completed a measured move price pattern since the March 2023 highs. The measured move is a 3-wave zig-zag-like price pattern, much like an ABC correction in which the first and third waves are of a similar length (waves A and C on the chart below). 

The measured move on USD/CAD looks like it has probably completed since waves A and C are of a similar length. If so, price has probably bottomed and is about to begin a cycle higher. 

US Dollar vs Canadian Dollar: Weekly Chart

There is also a confluence of support just under the June lows in the late 1.30s, made up of several longer moving averages and a major trendline. This is likely to underpin price at this level and reduces the chances of a breakdown. Only a decisive break below 1.3050 would provide evidence this thick band of weighty support has been definitively broken. A decisive bearish break is one that is accompanied by a longer-than-average red candlestick or three red candlesticks in a row. 

US Dollar vs Canadian Dollar: Daily Chart

The daily chart further suggests the potential for a bullish recovery. The move up from the June 27 bottom has been accompanied by strong momentum, as shown by the high reading on the Relative Strength Index (RSI) momentum indicator, which is higher than it was when prices were more elevated prior to the market bottom. 

The price is currently breaking above the 1.3270 key lower high, potentially confirming a short-term bullish reversal. The move could see a rise up to possibly as high as 1.3400 and the 50-day Simple Moving Average, bringing the short-term trend in line with the longer-term uptrend. 

Much depends on Wednesday’s close. If it is strongly bullish with the day closing near its elevated highs of 1.3293 then the breakout higher can be classed as decisive and likely to extend. If price drops back down, however, and ends the day below 1.3270, the break may have been false and prices could move lower or go sideways in the short time.