Canadian Dollar bears retain control near August 7 low amid US-Canada rate gap/trade war

The USD/CAD pair dipped below the psychological 1.4000 mark by the end of the Asian trading session on Friday, marking its lowest level since August 7th. Despite this, there are indications that the pair could continue its upward trend into the following week, buoyed by encouraging fundamental factors. The Canadian Dollar (CAD) has been falling relative to the US Dollar (USD) due to the widening gap between interest rates in the two countries, which continues to bolster the USD/CAD pair.

The Bank of Canada (BoC) kept its interest rate steady at 2.25% this month, while the US Federal Reserve (Fed) increased its benchmark rate by 25 basis points to a range of 3.75%–4.00% on Wednesday. This widening rate differential is adversely affecting the Loonie, as strategists at Scotiabank explain. Their "fair value model suggests an equilibrium exchange rate of 1.3894, indicating a degree of USD overvaluation in current spot rates."

This situation is further complicated by ongoing US-Canada trade tensions, with the US imposing steep 50% tariffs on roughly $20 billion worth of Canadian goods on August 22nd, while Canada retaliated with retaliatory tariffs ranging from 15% to 50% on about $20 billion worth of US goods on September 8th. These trade disputes are adding to the downward pressure on the commodity-linked Loonie, despite recent oil price increases.

Fed Chair Kevin Warsh's recent comments on inflation have also provided a reprieve for the US Dollar, which in turn is exerting a weakening influence on the USD/CAD pair. However, the US central bank's hawkish outlook, coupled with persistent geopolitical uncertainties, could provide a tailwind for the safe-haven USD, favoring USD/CAD bulls.

Technical analysis suggests that the USD/CAD pair has a near-term bullish bias, following a breakout through the 1.3940 confluence area - which includes the 100-day Simple Moving Average (SMA) and the 38.2% Fibonacci retracement level. Traders are watching the 50.0% retracement at 1.3993 closely, waiting for confirmation before positioning for further gains towards the 61.8% level at 1.4054 and then the 78.6% level at 1.4141, with the ultimate cycle high anchor at 1.4251.

The key drivers of the Canadian Dollar include the Bank of Canada's interest rate decisions, the price of oil, the health of the Canadian economy, inflation levels, and the trade balance, which is the difference between the value of Canada's exports and imports. As Canada's largest export, oil prices have a direct impact on the CAD value, with higher prices typically strengthening the currency.