Canadian Dollar softens as oil prices fall

The USD/CAD pair gathers strength to near 1.4275 during the early European trading hours on Tuesday. Falling crude oil prices drag the commodity-linked Canadian Dollar (CAD) lower against the US Dollar (USD). Canada’s Ivey Purchasing Managers Index (PMI) data is due later on Tuesday.

The Group of Seven nations (G7) on Friday agreed to release 100 million barrels of diesel and crude from emergency reserves and pledged to refrain from energy export restrictions after pressure from US President Donald Trump.

The release will add to Middle Eastern crude exports, which climbed above pre-war levels in four of the seven days of the final week of September, data showed on Monday. It is worth noting that Canada is a major oil-exporting country, and low crude oil prices generally have a negative impact on the Loonie.

On the other hand, lower bets of a Federal Reserve (Fed) rate hike this month could undermine the Greenback. The US Bureau of Labor Statistics (BLS) revealed on Friday that the US Nonfarm Payrolls (NFP) rose by 29K in September, versus a rise of 133K prior, below the market consensus of 90K. The Unemployment Rate climbed to 4.2% in September from 4.1% in August.

Markets are now pricing in nearly a 22.7% probability that the Fed will raise benchmark borrowing costs at its October policy meeting, according to the CME FedWatch tool.

Canada jobs data seen soft as BoC hike expectations leave Dollar exposed

Strategists at Brown Brothers Harriman note that attention will focus on Canada’s September labor force survey due Friday, with the economy expected to add “just +5.0k jobs after losing -41.7k jobs in August.” They point out that the “unemployment rate is seen rising 0.1ppt to 6.5% on an unchanged participation rate of 65.0%, pointing to weak labor demand,” underscoring a softer tone in the labor market.

Against this backdrop, BBH argues that “BoC rate hike pricing (100bps in the next twelve months) looks too aggressive and leaves CAD vulnerable to a dovish repricing.” The bank stresses that “Canada core inflation is near the banks’ 2% target and indicators point to continued excess supply in the economy,” suggesting limited justification for such an aggressive tightening path and reinforcing the risk of Canadian Dollar weakness if expectations are scaled back.

Logan’s hawkish tilt lifts Fed expectations and supports the Dollar

Fed’s Logan speech registers a notably hawkish tone, with a 9.2/10 FXS Speechtracker score compared to the established baseline of 8.1/10, underscoring a stronger inclination toward tighter policy. The emphasis on higher yields reflecting both increased term premiums and expectations of higher interest rates, alongside calls for at least 50 bps more in rate hikes and several additional moves, signals a clear preference for further tightening despite acknowledging uncertainty about the terminal rate. This combination of stronger economic expansion, a well-balanced labor market, and a renewed push to “revive price stability” reinforces a policy stance that is modestly tight but biased toward additional hikes, a backdrop that is typically supportive for the Dollar and a headwind for the Euro and Yen.

The FXS Fed Sentiment Index rises by 1.68 points to 136.59, confirming a deeper move into hawkish territory well above the neutral 100 threshold and aligning with the elevated FXS Speechtracker reading. This upward shift in the FXS Fed Sentiment Index reflects markets internalizing Logan’s message that without higher rates, inflation will not return to the Fed’s 2% target, thereby reinforcing expectations for a more prolonged period of restrictive policy.

Technical Analysis: USD/CAD retains a positive tone amid overbought conditions

In the daily chart, USD/CAD extends its advance well above the 20-day simple moving average (SMA) and the 100-day SMA, which reinforces a bullish near-term bias. Price is pressing into the upper area of the Bollinger envelope, while the Relative Strength Index (14) at 78.8 signals overbought conditions and hints that upside momentum could be stretched at current levels.

On the downside, initial support emerges at the Bollinger middle band around 1.4070, followed by the 100-day SMA at 1.4005, where a deeper pullback would be expected to attract fresh buying interest in the prevailing uptrend. Further below, the lower Bollinger band at 1.3775 stands as a more distant structural floor. On the topside, the immediate resistance level is the Bollinger upper band at 1.4365, a break of which would open the way for an extension of the bullish leg, though overbought readings warn of increasing risk of consolidation or a corrective setback before any sustained move higher.