Canadian Dollar underperforms as Oil prices correct significantly

The Canadian Dollar (CAD) underperforms its major currency peers on Friday. The North American currency faces selling pressure as Oil prices have retreated sharply after posting a fresh four-month high.

As of writing, the USD/CAD pair trades 0.1% higher to near 1.3846, extending its winning streak for the third trading day. The WTI Oil price is down almost 4% to near $96.50 after facing selling pressure above $100.

A sharp correction in Oil prices weighs on currencies from economies such as Canada, which is a net energy exporter.

The corrective move in Oil prices seems more like profit-booking, as the global energy supply mechanism remains disrupted in a tit-for-tat war between the United States (US) and Iran.

Meanwhile, Iran and Gulf states are set to hold a meeting on Monday aimed at securing buy-in for a temporary deal to manage shipping through the Strait of Hormuz, the Financial Times reported.

On the domestic front, investors await the Consumer Price Index (CPI) data for August, which will be released on Monday.

During the day, the major trigger for the USD/CAD pair will be the US CPI data for August, which will be published at 12:30 GMT.

The US CPI report is expected to show that headline inflation remained steady at 3.4% Year-on-Year (YoY), with core figures dropping to 2.4% from the previous reading of 2.5%.

Analysts at MUFG/BTMU argue that the upcoming US inflation data will be pivotal for near-term Fed expectations and the US Dollar (USD). They note that “if the reading is in line with the forecast or stronger the US rate market will continue to expect the Fed to hike rates supporting the USD.” By contrast, they warn that “a softer reading could trigger a bigger sell-off by encouraging the US rate market to scale back Fed rate hike expectations while other major central banks are expected to continue tightening policy.”

USD/CAD Technical Analysis

USD/CAD trades at 1.3845, retaining a mildly bearish bias on the daily chart as it holds just under the 20-day Exponential Moving Average (EMA) at 1.3856 and below the 50% Fibonacci retracement at 1.3900 of the latest upswing between May and July. The Relative Strength Index (14) at 46 sits slightly below the neutral midline, hinting at subdued upside momentum while keeping the focus on sellers as long as price remains capped by the nearby EMA and Fibonacci resistances.

On the topside, immediate resistance is aligned at the 20-day EMA around 1.3856, followed by the 50% Fibonacci retracement at 1.3900. A sustained break above these barriers would open the way toward the 38.2% level at 1.3982 and then the 23.6% Fibonacci retracement at 1.4084. On the downside, initial support emerges at the 61.8% Fibonacci retracement near 1.3818, with further floors seen at the 78.6% level at 1.3701 and the 100% retracement around 1.3553 if selling pressure resumes.