USD/CAD has extended its rebound from last week's low at 1.37317, climbing back above both its 100-hour and 200-hour moving averages and shifting the short-term technical bias more in favor of buyers.

Trade talks break down

The fundamental catalyst behind the move back higher has been the breakdown over the weekend of the latest U.S.-Canada trade negotiations. U.S. Trade Representative Jamieson Greer said the previous day that the United States had offered Canada significant concessions in the talks, but that Canada continued to seek more, contributing to the breakdown. Greer downplayed the broader economic impact of the dispute, saying the the latest tariff measures affect only a very small portion of overall U.S.-Canada trade. He argued that political considerations played a role in Canada's negotiating stance and reiterated that the U.S. trade deficit with Canada remains an issue for the administration. On the broader economy, Greer said the U.S. remains on a good trajectory with solid underlying fundamentals.

The breakdown introduces another layer of uncertainty for the Canadian economy. Given Canada's dependence on trade with the United States — the destination for roughly three-quarters of Canadian exports, under a relationship governed since 2020 by the USMCA trade pact — the market appears to be viewing the deterioration in relations as more of a risk for Canada, a dynamic that has helped weaken the Canadian dollar and push USD/CAD higher. On a more positive front, the two sides are continuing to talk: Canadian Trade Official LeBlanc said this morning that USTR Greer has acted in good faith.

Crude oil adds pressure

The Canadian dollar is also being pressured by a sharp decline in crude oil, which is down more than 3% and adding to the pressure on the CAD over the past two days. Because Canada is a major energy exporter, with energy products ranking among its most valuable overseas shipments, falling oil prices can act as a negative for the Canadian currency.

Technical picture

USD/CAD fell sharply last week, extending below its 200-day moving average and a lower channel trendline. The pair also broke below the 61.8% retracement of the move up from the May low, opening the door for a move into a swing area between roughly 1.3765 and 1.3778. Sellers pushed through that area and reached the 1.37317 low before the pair began its rebound.

The recovery initially moved back above the 100-hour moving average, currently near 1.3806, after the weekend trade-breakdown news. The price has since surged above that level, and also moved above the 200-day MA at 1.3844 and the 200-hour moving average not far from that level, at 1.3848. The 200-day moving average in particular is one of the most widely followed gauges of longer-term trend direction, which is why reclaiming both averages at once tends to carry weight with traders. That area is now the key short-term barometer for buyers and sellers: staying above it keeps the buyers in control at least in the short term, though more work is needed to wrestle fuller control from the sellers.

The next topside target comes against a swing area between 1.3868 and 1.3877. Above that, the 38.2% retracement of the decline from the July high is also nearby at 1.3882. A move above that cluster would give the buyers additional confidence and open the door toward the 100-day moving average at 1.3913, with the 50% retracement at 1.3929 the next target above that level.

Conversely, a move back below the 200-day and 200-hour moving averages would take some of the wind out of the buyers' sails. Traders would then look back toward the 100-hour moving average near 1.3806. That moving average is also close to the broken downward-sloping trendline, increasing the level's importance. A move below the 100-hour moving average and the short-term bullish bias would deteriorate, with the sellers starting to take back more control and the focus shifting again toward last week's lows.

For now, the buyers are making a play. The trade breakdown and falling crude oil prices are providing the fundamental catalyst, while the move above the 100-hour and 200-hour moving averages provides the technical support. Staying above the 200-hour moving average keeps the buyers in control and the focus on the next topside targets. With both sides still talking, further headlines from the negotiations — along with the direction of crude oil — will remain the key variables for traders to monitor.

Source: Investinglive