Traders appear disengaged amid mixed fundamentals

• USD/CAD draws sellers for second straight day, although downside appears limited.
• Oil prices rise amid Middle East tensions and support the Loonie, weighing on the major.
• Low bets on a 50bps Fed rate cut in November provide support to the USD and the pair.

The USD/CAD pair is extending its overnight pullback from a one-week high and remains under some selling pressure for a second straight day on Wednesday. Fears of an all-out war in the Middle East escalated further after Iran fired more than 200 ballistic missiles at Israel on Tuesday in retaliation for Israeli aggression in Lebanon against the Iran-backed Hezbollah armed movement. In addition, Israeli Prime Minister Benjamin Netanyahu promised that Iran would pay for its missile attack. The development fuels concerns that an Israeli attack on Iran’s oil facilities could disrupt supplies from the key producing region, which continues to support crude prices. This, in turn, is seen underpinning the commodity-linked Loonie and pulling the currency pair lower.

The US dollar (USD), on the other hand, is holding on to its recovery gains over the past two days amid signs of resilience in the US labor market and could help limit losses for the USD/CAD pair. In fact, the U.S. Bureau of Labor Statistics (BLS) Job Openings and Turnover Survey (JOLTS) showed that job openings unexpectedly rose after two consecutive monthly declines to 8 .04 million in August. This comes on top of relatively dovish remarks from Federal Reserve (Fed) Chairman Jerome Powell earlier this week and has forced investors to reassess the likelihood of more aggressive policy easing. That said, the Institute for Supply Management’s (ISM) manufacturing PMI indicated that business activity contracted for a sixth consecutive month in September.

This keeps the door open for another 50 basis point interest rate cut by the Fed in November, which in turn prevents USD bulls from placing aggressive bets and does not help the USD/CAD pair to attract significant buyers . Meanwhile, expectations for a further interest rate cut by the Bank of Canada (BoC) should limit gains for the Canadian dollar (CAD) and help limit losses for the currency pair. Traders may also prefer to wait for the monthly US employment details, popularly known as the Nonfarm Payrolls (NFP) report due on Friday, before positioning for the next leg of a directional move. Meanwhile, Wednesday’s release of the US ADP private sector employment report could produce near-term opportunities later in the North American session.

Technical perspectives

From a technical perspective, the overnight failure to find support above the 50% Fibonacci retracement level of the recent decline from the September monthly peak and subsequent decline favors bear traders. In addition, the oscillators on the daily chart are holding in negative territory and have started to decline again on the hourly charts, suggesting that the path of least resistance for the USD/CAD pair is to the downside. Therefore, further weakness below the 1.3475-1.3470 area, towards a retest of the multi-month low around the 1.3420 region reached last week, seems a distinct possibility. The latter is closely followed by the round figure of 1.3400, which, if decisively broken, will pave the way for a resumption of the recent well-established downtrend seen over the past two months or so.

On the other hand, any attempted recovery beyond the psychological 1.3500 mark could continue to face stiff resistance near the 1.3535-1.3540 region or the 50% Fibo. level. That said, some further buying beyond the 200-period simple moving average (SMA) on the 4-hour chart could trigger a short-covering move and lift the USD/CAD pair into the 1.3580 supply area. The latter is closely followed by the all-important 200-day SMA, currently pegged just ahead of the 1.3600 threshold. Sustained strength beyond the mentioned handle will set the stage for a move towards challenging the monthly top around the 1.3645-1.3650 region.

USD/CAD 4 hour chart