The USD/CAD pair held relatively steady during Friday's Asian trading session, hovering near the 1.3700 level after giving up some of its earlier gains. The pair's retreat primarily reflects the Canadian dollar finding some temporary support, benefiting from a rebound in crude oil prices from recent lows.
Specifically, West Texas Intermediate (WTI) crude oil prices climbed back to around $63.50 per barrel, providing support for the commodity-linked Canadian dollar. However, the upside potential for oil prices remains somewhat constrained.
As the United States and Iran confirmed talks would be held in Oman, market concerns about a rapid escalation of Middle East tensions in the short term have eased. This has led to some retracement of the risk premium previously built into oil prices.
From the US dollar's perspective, the downside for USD/CAD is also limited. The US Dollar Index continues to trade near two-week highs, reflecting market expectations for a more cautious approach to interest rate cuts from the Federal Reserve.
Recent commentary from Fed officials has emphasized that policy should not be eased prematurely until there is clearer evidence of a sustained decline in inflation, providing underlying support for the dollar sentiment-wise. Additionally, markets are assessing the potential implications of Kevin Warsh's nomination for Fed Chair.
He is perceived as favoring a smaller balance sheet and a relatively restrained stance on interest rate cuts. This expectation has alleviated some market concerns about monetary policy independence, contributing to stability for the US dollar.
However, a series of US labor market data released this week was generally weaker, indicating a gradual cooling in the job market. Consequently, markets have reinforced their bets on rate cuts within the year, now widely anticipating two potential Fed rate cuts in 2024, with the first possibly in June, followed by another potential adjustment in September.
This expectation has, to some extent, capped the US dollar's upside potential, leaving USD/CAD lacking a clear catalyst for a directional breakout. From a daily chart perspective, USD/CAD has entered a consolidation phase after its recent rebound, remaining within a medium-term, slightly bullish trading range. The pair's back-and-forth movement around 1.3700 indicates a temporary balance between bullish and bearish forces.
On the upside, the 1.3750–1.3780 zone constitutes a significant near-term resistance area. A renewed weakening in oil prices or strengthening of the US dollar could see the pair test this region, with further resistance seen near 1.3850.
For support, the 1.3650 level acts as initial support. A break below this could lead to a test of the 1.3580–1.3600 range, which aligns with the previous consolidation platform. Overall, influenced by the interplay of fluctuating oil prices and US dollar strength, USD/CAD is more likely to maintain a high-level, range-bound oscillation between 1.3600 and 1.3800 in the near term.
The current movement of USD/CAD essentially reflects a tug-of-war between oil price dynamics and US monetary policy expectations. The rebound in oil prices provides temporary support for the Canadian dollar, but its sustainability remains uncertain against a backdrop of diminishing geopolitical risk premiums. Simultaneously, the Fed's cautious stance on cutting rates prevents the US dollar from weakening significantly. Until new macroeconomic data or clearer trends in the oil market emerge, USD/CAD is more likely to maintain its high-level consolidation pattern, with a decisive directional move awaiting clearer catalysts.