Home USD/CAD Outlook: Loonie Deriving Support from Oil Rally

USD/CAD Outlook: Loonie Deriving Support from Oil Rally

  • A rally in oil prices on Friday strengthened the Canadian dollar.
  • BOC’s Tiff Macklem noted that the recent rise in long-term bond yields couldn’t replace monetary policy.
  • Money markets indicate a 36% chance of a BOC rate hike in October.

Canadian dollar strength extended amid rising fuel prices, leading to a bullish USD/CAD outlook today. The Canadian dollar made slight gains against the US dollar on Friday, primarily due to a sharp increase in oil prices, a significant export for Canada. Moreover, investors bet on the possibility of another interest rate hike by the Bank of Canada later in the month.

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Notably, oil prices surged by 5.8% as investors factored in the potential expansion of the Middle East conflict.

Meanwhile, Bank of Canada Governor Tiff Macklem noted that the recent rise in long-term bond yields couldn’t replace monetary policy. Moreover, the bank must decide whether to let prior rate hikes take effect in the economy or raise rates again to combat persistent inflation. 

Money markets indicated a 36% chance of a rate hike at the central bank’s upcoming policy decision on October 25. This is an increase from the 27% probability before Macklem’s statement. The central bank has increased interest rates ten times in 18 months, reaching a 22-year high of 5%. Nonetheless, it didn’t anticipate inflation slowing to its 2% target until mid-2025.

Notably, there was an unexpected contraction in Canada’s growth in the second quarter, and economic activity stagnated in the first two months of the third quarter. The rate announcement will come with an update to the bank’s economic forecasts.

Elsewhere, Canadian home sales declined for the third consecutive month in September. 

USD/CAD key events today

Canada and the US will not release any major economic reports today, which could lead to a quiet trading session.

USD/CAD technical outlook: Bulls retain control despite pullback.

USD/CAD technical outlook
USD/CAD 4-hour chart

The USD/CAD price declines on the 4-hour chart after finding resistance at 1.3701. Nevertheless, the bulls are still in the lead because the pullback is above the 30-SMA. Moreover, the RSI sits slightly above 50, supporting bullish momentum. 

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Bears remain weaker than bulls, as seen in the price action. The decline has made much smaller candles as compared to the initial rise. It indicates a weaker move that might not go below the 30-SMA support. If bulls return at the SMA, the price will likely climb to break above 1.3701.

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Saqib Iqbal

Saqib Iqbal

Saqib Iqbal is a market analyst, prop fund trader and mentor, serving the industry with his analysis and educational content since 2011. The author has great exposure to different financial markets and institutions. He's well-known for his day trading reviews and multiple timeframe analysis.