USD/CAD recovers 1.3500 and higher, sees weekly top on modest USD strength

• USD/CAD rises for second straight day amid sustained USD buying interest.
• Short bets on aggressive Fed policy easing and geopolitical risks underpin the money.
• A modest drop in oil prices is weighing on the Loonie and contributing to the rally.

The USD/CAD pair is attracting some further buying for the second day in a row on Thursday and climbing back above the psychological 1.3500 mark during the Asian session. The move to the upside is sponsored by a stronger US dollar (USD), which continues to draw support from a combination of factors and supports the prospects for a further appreciation move later in the day.

The USD index (DXY), which tracks the greenback against a basket of currencies, advanced to a three-week high amid reduced bets for more aggressive policy easing by the Federal Reserve (Fed). Markets continue to reduce expectations for another excessive interest rate cut by the US central bank following upbeat US data this week that pointed to a still resilient labor market. This, along with rising conflicts in the Middle East, further benefits safe haven money, which is seen as a key factor acting as a tailwind for the USD/CAD pair.

Meanwhile, an unexpected rise in US crude stockpiles on Wednesday indicated that the market is well-supplied and could withstand any disruption from the ongoing conflicts in the Middle East. That, in turn, is dragging crude oil prices off their more than one-week high hit on Wednesday and undermining the commodity-linked Loonie. Apart from this, expectations for a further interest rate cut by the Bank of Canada (BoC) is proving to be another factor weighing on the Canadian dollar (CAD) and contributing to the tone of the auction around the USD/CAD pair.

The fundamental backdrop mentioned above favors bullish traders and suggests that the path of least resistance for spot prices is up. Therefore, further strength back towards testing the weekly top around the 1.3535-1.3540 region seems a distinct possibility. Traders are now looking forward to the US economic file – with weekly data on initial jobless claims and the ISM Services PMI. Apart from that, Fedspeak will boost USD demand, which along with oil price dynamics should produce short-term trading opportunities around the USD/CAD pair.