USD CAD rises to key resistance on USD rebound crude oil pressure

USD/CAD rose sharply on Tuesday as the US dollar rebounded despite Monday’s dovish comments from Fed Governor Lael Brainard, and falling crude oil prices pressured the Canadian dollar once again. This drop in crude oil occurred after the International Energy Agency (IEA) projected a persisting oversupply situation well into 2017 due to a likely slowing of demand growth and rising supply.

The combination of a rebounding US dollar and an oil-pressured Canadian dollar boosted USD/CAD up to approach major resistance around the key 1.3200 level and the underside of a clear uptrend line extending back to May’s 1.2500-area lows. In the process of Tuesday’s rise, USD/CAD also rose tentatively above its 200-day moving average.

Prior to Tuesday’s bullish price action, the US dollar came under significant pressure after Brainard cautioned on Monday against raising interest rates too quickly. The dollar’s rebound on Tuesday, however, reversed those losses, even as the market-viewed probability of a September Fed rate hike remained exceptionally low at around 15%.

Pressure on the Canadian dollar has been driven to a large extent by recent pressure on crude prices as oversupply worries continue to plague the oil markets. The IEA’s projections simply helped exacerbate those worries, leading to further declines for crude oil and the Canadian dollar.

As noted, USD/CAD has reached up to a major confluence of resistance around the 1.3200 level. Any further rise and breakout for the currency pair should remain contingent upon further pressure on crude oil as well as continued upside momentum for the US dollar. The latter, in turn, will be contingent upon an array of potentially pivotal US economic data releases this week as well as the highly anticipated FOMC meeting next week. This week brings the Producer Price Index (PPI), Consumer Price Index (CPI), retail sales, consumer sentiment, weekly jobless claims, and the Philly Fed Manufacturing Index. All of these releases could have some impact on next week’s Fed rate decision (Sept. 21) and the US dollar.

With any sustained breakout above 1.3200 resistance, the next major upside target is at the key 1.3400 resistance level. In the opposite event that 1.3200 resistance holds, a turn back to the downside could once again target the 1.3000 and 1.2800 support objectives.