The USD/CAD currency pair encountered strong resistance around the 1.3300 level during the New York session. This resistance was influenced by factors such as a cautious market sentiment, negative expectations for second-quarter corporate earnings, and a decline in the US Dollar Index (DXY) despite the anticipation of interest rate hikes. Additionally, the Canadian Dollar received support from rising oil prices, further impacting the currency pair’s dynamics.
The S&P500 is expected to open on a negative note as investors adopt a cautious approach, considering the upcoming corporate earnings season. The anticipation of subdued earnings is primarily attributed to the Federal Reserve’s decision to raise interest rates and the tightening credit conditions implemented by commercial banks. These measures aim to maintain asset quality amidst a potentially turbulent economic environment.
The US Dollar Index (DXY) faced selling pressure around 103.20, causing a decline, despite the focus on the release of the Federal Open Market Committee (FOMC) minutes. While Fed chair Jerome Powell has advocated for two more interest rate hikes, the investing community predicts only one rate hike by the end of the year. Economists at MUFG suggest that the scope for the Dollar to strengthen throughout the second half of the year is limited, given the already priced-in expectations and the potential for rate hikes by other G10 central banks.
On the other hand, the Canadian Dollar gained strength due to the surge in oil prices. With West Texas Intermediate (WTI) futures climbing near $72.00, buying interest was stimulated by Saudi Arabia’s announcement of production cuts. Canada, being a major oil exporter to the United States, benefits from higher oil prices, bolstering the Canadian Dollar.
Economists at Société Générale have analyzed the Canadian Dollar’s outlook and anticipate a decline in the USD/CAD pair below the 1.30 level. The relative rates between the US and Canada are likely at their peak for the current economic cycle, which should support the CAD going forward. While the possibility of further tightening by the Federal Reserve and potential rate hikes by the Bank of Canada may prevent a rapid movement, Société Générale expects a return to a trading range of 1.25-1.30 for USD/CAD by the end of the year.
It should be noted that uncertainties surround the impact of recent wildfires on the Canadian economy. Moreover, if Canada successfully curbs inflation, the urgency for additional policy tightening may decrease, contributing to a slow downtrend in USD/CAD rather than ruling out sustained levels below 1.30.