The USD/CAD pair is showing signs of recovery near the 1.3175-80 level following its largest daily loss in eight days. The Loonie’s retreat is attributed to the drop in WTI crude oil prices, which is a significant export for Canada, and the stronger US Dollar. These factors are influencing the market during a slow Tuesday morning in Asia.

Despite the bullish momentum of the US Dollar and the Bank of Canada (BoC) survey results, USD/CAD has remained unfazed due to the surge in WTI crude oil prices, reaching a three-month high.

However, the market’s reassessment of oil fundamentals and a cautious approach ahead of the Federal Open Market Committee (FOMC) monetary policy meeting scheduled for Wednesday have prompted selling pressure on the Loonie pair in recent times.

A recent Bank of Canada (BoC) survey indicated that most market participants expect the BoC to maintain its policy rate at 5% until the end of 2023. Additionally, the poll predicts a reduction of the key interest rate to 3.50% in the fourth quarter of 2024.

On the other hand, the US Dollar Index (DXY) has seen a five-day uptrend, reaching a two-week high near 101.40, and it remains mildly bid around 101.45 currently. The uptrend is driven by relatively positive PMI data and optimistic yields.

Notably, the US S&P Global Manufacturing PMI for July improved to 49.0, beating both the previous reading of 46.3 and market expectations of 46.4. However, the Services PMI eased to 52.4, falling short of the expected 54.0 and previous reading of 54.4.

The Composite PMI also decreased to 52.0 from 53.2 prior and below the market forecast of 53.1. Meanwhile, the Chicago Fed National Activity Index for June declined to -0.32 from the revised -0.28, missing the market forecast of 0.03.

It’s important to note that the overall weakness in global PMIs has bolstered market sentiment as investors hope for an end to the tightening cycle at major central banks. This sentiment has supported the WTI crude oil prices amid fears of supply shortages.

Additionally, hopes of increased stimulus from China and the possibility of the US purchasing more oil to refill its Strategic Petroleum Reserves (SPR) are favoring oil buyers.

Discussions of energy markets remaining tight in late 2023 have further boosted WTI crude oil, with prices jumping the most in six weeks to reach around $79.25 and trading at $78.75 at the time of reporting.

Looking ahead, USD/CAD traders will be paying attention to the US CB Consumer Confidence for July, expected to be 112.1 compared to the previous 109.70. However, the primary focus will remain on oil prices and the market’s expectations regarding the Fed’s future moves for clearer guidance.


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