Double Easing Expectations Suppress Dollar Trends
This week's focus in the forex market is on the policy directions of the Federal Reserve and the Bank of Canada. With both central banks potentially cutting rates in October, the USD/CAD continues to weaken, nearing 1.3990 during the Tuesday Asian session, marking a decline for the second consecutive trading day.
The market is betting that the Federal Reserve will cut interest rates by 25 basis points at this month's meeting, bringing the federal funds target range down to 3.75%-4.00%. CME FedWatch data shows a 97% probability of a rate cut, with expectations for a December cut also exceeding 95%. Analysts point out that the market has almost entirely priced in the rate cut expectations, significantly weakening the dollar's rebound momentum.
Meanwhile, the U.S. government's budget deadlock and economic data gaps have created divisions within the decision-makers. Some Fed officials are concerned about weak employment and advocate for early cuts, while the hawkish camp still considers inflation too high to relax monetary policy. This uncertainty is pressuring the dollar index and indirectly driving funds towards other major currencies.
Weak Oil Prices Undermine CAD Support
Although a weaker dollar typically benefits the Canadian dollar, the recent decline in oil prices has dampened the CAD's rebound momentum. WTI crude has fallen for three consecutive days, with market concerns that OPEC+'s plans to increase production in December may lead to another supply glut.
As a major energy exporter, Canada's economy is highly sensitive to crude prices. A $10 drop in oil prices will decrease Canada's export income by approximately CAD 3 billion. Consequently, the CAD is hit by the ripple effects of weakness in the energy market, making it difficult to fully benefit when the dollar weakens.
Currency strategist Alan Reed pointed out, "In the short term, CAD movements are more dependent on oil prices than on rates. If energy prices remain weak, even a moderate rate cut by the Bank of Canada may not be able to stabilize the CAD."
Renewed Trade Frictions Pose New Pressure on CAD
Aside from oil prices, trade policies have become another risk factor for CAD. Last week, U.S. President Trump announced a 10% tariff increase on certain Canadian goods in response to what he called "unfair practices" in Ontario's international event advertising.
This move has raised market concerns about renewed tensions in U.S.-Canada trade relations, potentially affecting manufacturing investment and export performance. Analysts expect the Bank of Canada to adopt a more dovish stance in this context. The market widely predicts a 25-basis-point rate cut at the Bank of Canada's Wednesday meeting to hedge against external uncertainties and slow domestic growth.
Financial markets have reacted cautiously. Canada's two-year government bond yield fell to 3.62% in early trading this week, a two-month low, reflecting high expectations of future monetary easing among investors.
Technicals Indicate Bearish Bias, Short-Term Weakness Likely
From a technical perspective, the USD/CAD remains in a downward channel, with a short-term bearish trend. Prices are consistently capped at the psychological level of 1.4000, and failure to stabilize may lead to further tests of the 1.3950 and 1.3900 support ranges. If it breaks below 1.3900, bearish targets may aim for 1.3850.
The Relative Strength Index (RSI) has fallen below the 50 midline, indicating weak momentum; the MACD's death cross is widening, suggesting bearish dominance. Conversely, should the price break through the 1.4030 to 1.4080 range, a corrective rebound could be initiated, with a short-term target near 1.4120.
Market Outlook: Wait and See, Awaiting Clear Policies
Overall, the short-term trend of USD/CAD will continue to be guided by central bank policy expectations. If both the Fed and the Bank of Canada cut rates simultaneously, the exchange rate might enter a transient ranging phase. The market is awaiting the outcome of both central bank meetings this week to gauge the future policy pace.
Analysts generally believe that a wait-and-see approach is prudent in the short term. If oil prices stop declining and stabilize, the CAD may see a corrective rebound; if trade frictions escalate or oil prices fall again, the USD/CAD might test the key 1.38 support level within the year.
The market focus has now shifted to Wednesday evening's Bank of Canada statement and Powell's speech the following day, which will determine whether the USD/CAD can maintain its foothold below 1.40.
