USD/CAD Knocked from Its Perch as US Dollar Rally Pauses for Breath

The US dollar rally has finally lost some momentum after three strong weeks, allowing USD/CAD to retreat from its cycle high. Softer US data, reduced Fed hike bets and easing Treasury yields have weighed on the greenback, while a strong Canadian trade surplus and the prospect of firmer crude oil add to the case for a near-term USD/CAD pullback.

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USD/CAD Retreats as the US Dollar Rally Loses Momentum

A weak payrolls report and slightly softer headline ISM services print helped the US dollar index retreat further from Monday’s cycle high, as Fed hike bets were scaled back. The bond-market selloff also stabilised to pull Treasury yields a touch lower, though they remain firmly elevated. Trade data showed imports surged 4.3% to a record $420.8 billion, widening the deficit to $105.6 billion and building the case for weaker growth.

A firmer euro also contributed to US dollar weakness, with bets of an ECB hike in December rising to 80%. French bond yields also pulled back from their highs as bond-market stress eased.

The weaker US dollar helped USD/CAD pull back from arguably stretched highs, aided by an unexpectedly strong Canadian trade surplus. Commodity FX was higher in general, with NZD/USD the strongest FX major and AUD/USD rising for a third day, in line with my near-term bias. It seems markets are taking advantage of the minor reprieve from the US dollar rally, while risk appetite on Wall Street amid earnings optimism also helped.

US Dollar Index (DXY) Technical Analysis

We have just witnessed the strongest three-week rally for the US dollar index since November, but with resistance on hand, a pause in the trend – if not a pullback – is arguably due. The fact that payrolls undermined the rally strengthens the case for momentum to lose steam over the near term.

DXY Weekly Chart Points to a Pause

We’re not even halfway through the week, but DXY is on track for a bearish pinbar should it close around current levels or lower by Friday. Note that prices are back below the May high, while this week’s high has so far respected the upper trend-channel resistance and has not yet managed to test the 50% retracement level between the January 2025 high and January 2026 low. The weekly RSI (2) was also heavily overbought last week.

The daily chart shows a small bearish engulfing candle formed on Tuesday, following a wide-bodied shooting star on Monday. A bearish divergence also formed on the daily RSI (2) within the overbought zone, while RSI (14) is now curling lower from its own overbought zone.

US Dollar Pullback Could Remain Shallow

None of this points to a sharp pullback at this stage, and we should keep in mind the strength of the three-week rally that took us to these levels. But with a lack of top-tier data aside from the FOMC minutes, we could now find volatility across FX majors remains on the lower side while a shallow pullback plays out on DXY.

Source: ICE, TradingView

USD/CAD Technical Analysis: US Dollar vs Canadian Dollar

Widening yield differentials between the US and Canada helped USD/CAD enjoy its best three-week rally since December 2024. With the US-Canada 2-year spread remaining pinned near cycle highs, I am not on guard for a deep pullback on USD/CAD.

But given the rally has stalled around the June high, with a shooting star candle followed by bearish range expansion, perhaps a pullback to the 10-day EMA at a minimum is due. And like the US dollar index, the daily RSI (2) on USD/CAD formed a bearish divergence within its overbought zone, while RSI (14) is curling lower from its own overbought zone.

Crude Oil Bounce Could Deepen the USD/CAD Pullback

The 4-hour chart shows support has been found around its 50-bar EMA and weekly pivot point, while RSI (2) is heavily oversold. Perhaps bears may be seeking to fade into moves towards the June high and maintain a near-term bearish bias while USD/CAD remains beneath Monday’s high.

Note the Brent futures chart I have overlaid is inverted, as it tends to correlate positively with USD/CAD. So if oil prices bounce – which I have a hunch they may – it could build the case for a slightly deeper pullback in USD/CAD over the near term.

Source: ICE, TradingView

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