Canadian Dollar Outlook: USD/CAD Gains On Oil Bloodbath, Fed Rate Verdict Ahead

By Diego Colman of DailyFX

Thursday, September 15, 2022 2:35 PM EDT

The Canadian dollar weakened against the U.S. dollar on Thursday, weighed down by a bearish mood on Wall Street, but more importantly by the sharp slump in oil prices, triggered by fears that the world economy is headed for a recession.

News that the White House will not rush to refill the Strategic Petroleum Reserves and that the process will not include a “trigger price” accelerated the fossil-fuel sell-off, with WTI front-month futures dropping as much as 4% at one point. Oil is one of Canada’s top exports. When the commodity drops significantly, the country’s terms of trade stand to worsen if the move is sustained, a situation that undermines the Loonie.

Looking ahead, the slowdown in the global economy, coupled with recent energy market underperformance, will create some challenges for the Canadian dollar, tilting USD/CAD higher. This dynamic could be reinforced if sentiment deteriorates substantially, as the U.S. dollar tends to trade as a risk-off proxy against high-beta currencies in times of heightened uncertainty. This, however, is a long-term theme.

Short-term USD/CAD Outlook

From a shorter-term perspective, there are important catalysts on the horizon worth keeping an eye on; one of them being the September FOMC decision next week. The Fed is expected to raise borrowing costs by 75 basis points to 3.00%-3.25%, but traders may be more focused on the dot plot to assess the new terminal rate estimate and the broader policy outlook.

Policymakers are likely to forecast a higher peak rate for the current tightening cycle than the projection published in the June SEP in light of persistently elevated price pressures and demand resilience. The central bank could also signal that monetary policy will remain restrictive for longer than initially anticipated to bring inflation back to the 2% target, which could bolster the U.S. dollar while also increasing the risks of a hard landing.

If the U.S. enters a recession, Canada’s economy could take a major hit, given the strong trade relationship between both countries. The possibility of this scenario materializing will keep traders on edge, making the Canadian dollar vulnerable to outsize losses from time to time.

USD/CAD Technical Analysis

In terms of key levels for USD/CAD, an initial resistance is seen around 1.3225. If bulls manage to push prices above this barrier, breakout traders could jump back in, reinforcing upside momentum and paving the way for a move toward the psychological 1.3300 handle. On further strength, the focus shifts to the 1.3390/1.3420 area. In the event of a bearish reversal, the first key technical support to consider appears at 1.3080, followed by 1.2960.

USD/CAD Technical Chart

(Click on image to enlarge)