USD/CAD Drops Back Below 1.36500 Mark On Rebounding Crude Oil Price, Building Permits (Sep) Preliminary Data Awaited

Key Takeaways:

• The USD/CAD cross witnessed fresh selling on Wednesday during the early-Asian session and moved back below the 1.36500 mark 
• Uncertainty about the Fed's future rate hike path weighs on the buck 
• Rebounding crude oil prices underpin the commodity-linked Loonie 
• Investors look forward to the release of the U.S. Building Permits (Sep) preliminary data for fresh USD/CAD directional impetus 

USD/CAD pair struggled to capitalize on the overnight bounce from the vicinity of the 1.36340 level, attracted fresh selling on Wednesday during the second part of the Asian session and dropped back below the 1.36500 mark.

A fresh leg down in U.S. Treasury bond yields and a weaker risk tone helped revive the U.S. dollar supply, which in turn was seen as a key factor that undermined the USD/CHF pair. The U.S. Dollar Index (DXY), which measures the value of the USD against a basket of currencies, extended its pullback from a one-week high/ (106.788) touched on Friday and was seen trading in heavy losses below the $106.200 mark on Wednesday. Apart from this, signs of stability in the U.S. equity markets continue to act as a headwind to the buck and help cap the upside for the USD/CAD cross.

Moreover, uncertainty about the Fed's future rate hike path is another factor weighing the buck and helping limit meaningful gains around the USD/CAD cross. Recently, several Fed officials have softened their stance on an aggressive approach toward tackling stubborn inflation in the U.S. and have advocated for a second consecutive dovish pause during the November meeting. Noteworthy, Philadelphia Federal Reserve President Patrick Harker stated on Monday that interest rate hikes are likely over and that the U.S. central bank should hold rates steady in the absence of some turn in the data.

Further contributing to the sentiment around the USD/CAD cross is the modest rise in crude oil prices after industry data on Tuesday showed a massive surge in crude oil stock in the U.S. amid worries about supply disruptions from the Middle East due to a deepening Israel-Hamas conflict.

Despite the combination of negative factors, the greenback continues to be supported by fresh, positive U.S. macro data released on Tuesday, which showed retail sales in the U.S. advanced 0.7% MoM in September 2023, following an upwardly revised 0.8% rise in August and beating forecasts of a 0.3% advance, a U.S. Census Bureau report showed. Excluding automobiles, retail sales in the U.S. rose 0.6% last month, beating market forecasts of 0.2%, but were down from 0.9% in August.

Furthermore, a Statistics Canada report released on Tuesday showed that the annual inflation rate in Canada declined to 3.8% in September of 2023 from 4% in the previous month, below market expectations of 4%. Every month, the CPI fell by 0.1%, the first reduction of the year. Excluding food and energy, the annual inflation rate in Canada fell to 2.8% in September 2023, the lowest since June 2021, slowing down from 3.3% in the prior month. Every month, Core consumer prices in Canada fell by 0.1% from a month earlier in September 2023, after a 0.1% increase in the prior month. The data report has reaffirmed market expectations that the Bank of Canada (BoC) will refrain from further rate hikes in the current cycle, which weighs on the loonie.

In contrast, markets are convinced that the Fed will hike interest rates by at least 25bps during the November or December meeting after a slew of U.S. economic data released early this month pointed to a further growing need for a rate hike by the Fed. Additionally, a surprisingly hot reading in September's consumer and producer price index reports indicated an increasingly complex pathway to bring down inflation by the Federal Reserve. This, in turn, suggests the path of least resistance for the USD/CAD pair is to the upside, and any subsequent down move is still seen as a buying opportunity.

As we advance, investors look forward to the U.S. docket featuring the release of the Building Permits (Sep) preliminary data report. Investors will look for cues from the speeches of several Fed officials who are set to speak today.

Technical Outlook: Four-Hour USD/CAD Price Chart

From a technical standstill, the USD/CAD pair is currently trading just above the crucial pivot point(P) - 1.36362, which, if sellers manage to convincingly breach, will be followed by the 50-day (red) Exponential Moving Average (EMA) at 1.36334 level, downside pressure could accelerate, paving the way for a drop toward the 1.36040 support level (S1). On further weakness, the USD/CAD pair could drop toward the support level plotted by an ascending trendline extending from the early October 2023 swing low. A subsequent break below this support level (bearish price breakout) will pave the way for a move toward tagging the technically 200-day solid (yellow) EMA level at 1.35744. A convincing move below this level will negate any near-term bullish outlook and pave the way for more losses around the USD/CAD pair.

On the flip side, if buyers resurface and spark a bullish turnaround, initial resistance comes in at the downward-sloping trendline extending from the early-October 2023 swing high. A clean break above this resistance level will pave the way for a move toward the 1.34673 resistance level (R1), about which, if the price pierces this barrier, buying interest could gain further momentum, paving the way for a move toward the next relevant resistance level at 1.37361.