USD/CAD: Loonie rallies to best levels in a month as $100 crude risks grow

• Bloomberg Survey: Chance of a recession happening over the next 12 months is 45%
• Canadian swaps pricing in 27.6% chance of a rate hike at October 25th meeting
• Oil rally stalls as Saudis deliver cautious outlook.

FX traders were not expecting significant moves to start this trading week, which is filled with several key rate decisions.  One of the standout trades for September has been the rally with oil prices. Throughout large parts of the pandemic, oil exporting countries haven’t seen the strongest correlation with oil prices and their respective currencies.  The Canadian dollar rally that started on September 7^th could be mostly attributed to the surge in oil prices.  A dollar peak has not been priced in and Canadian economic exceptionalism was not the primary driver behind the latest move.

All eyes on FOMC meeting

Wall Street is hoping that the end of the Fed’s inflation fight is here, but that might not be the case as a resilient economy might keep pricing pressures in place.  The Fed might try to deliver a hawkish hold, but if markets don’t believe that they will tighten again, we could see a reversal in the US dollar.  Eventually, the risk of more tightening will lead to a sharper hit to growth, which could have some traders start to doubt the soft-landing narrative.

Canada’s Housing Market

Today’s release of better-than-expected Canadian housing starts and industrial product prices are providing a modest boost to the Loonie. The trend for Canada’s housing market is somewhat flat, but downward pressures are expected to remain.

The USD/CAD daily chart highlights the recent slide which is facing key support from the 200-day SMA, which is the 1.3465 level. If bearish momentum remains in place, price might target the 1.3250 region.  If dollar strength returns, the 1.3700 level provides critical resistance.

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