Canadian Dollar firms as Oil rebounds, USD softens on weaker ADP data

USD/CAD trades around 1.4040 on Wednesday at the time of writing, down 0.14% on the day, as the Canadian Dollar (CAD) benefits from a rebound in Oil prices. Crude prices received support after Yemen's Houthis claimed responsibility for an attack on a Saudi vessel in the Red Sea, temporarily raising concerns over global energy supplies.

However, the upside in Oil prices remains limited by hopes of a diplomatic breakthrough in the Middle East. According to Axios, the United States (US), Iran and Oman are close to reaching an interim agreement to reopen the Strait of Hormuz. The proposed framework would establish a 60-day temporary arrangement across the strategic waterway, which handles nearly 20% of the world's energy supply. US Treasury Secretary Scott Bessent also said that a deal could be announced as early as Wednesday, boosting optimism for a gradual normalization of the situation.

On the US side, the US Dollar (USD) remains pressured by another round of softer economic data. The Automatic Data Processing (ADP) Employment Change report showed that private payrolls increased by 44K in July, well below the market expectation of 70K. The release follows weaker Job Openings and Labor Turnover Survey (JOLTS) data and a decline in Factory Orders earlier this week, reinforcing expectations that the Federal Reserve (Fed) could adopt a more accommodative stance.

According to the CME FedWatch tool, markets have scaled back expectations for a September Fed rate hike. However, comments from Fed officials, including Kansas City Fed President Jeff Schmid and Philadelphia Fed President Anna Paulson, continue to highlight persistent inflation risks, which could help limit deeper US Dollar losses.

Investors now await the release of the Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI), along with further comments from Federal Open Market Committee (FOMC) officials. Market attention also remains focused on Friday's US and Canadian employment reports, which could provide a clearer direction for the USD/CAD pair.

CAD underperforms peers even as data support builds and USD/CAD technicals turn

Analysts at Scotiabank highlight that the Canadian Dollar has lagged its peers, noting that “the CAD has failed to pick up much support from the generally softer USD tone that has developed over the past week.” They point out that the currency is “effectively unchanged since the day of the FOMC whereas the G10 currencies have generally strengthened,” with the JPY “clearly been boosted by intervention,” and the NZD and AUD both having “picked up more than 1%.”

According to Scotiabank, the CAD’s underperformance reflects “trade uncertainty and a Bank of Canada that appears firmly in neutral,” but they argue that “some pick up in the currency appears overdue.” They stress that “relative US/Canada data outcomes reflect a steady improvement in positive Canada data surprises versus the US,” and that “this is sometimes slow in getting reflected in the exchange range as monetary policy expectations adjust but there is fundamental support for the CAD from the economic data.” In this context, they note that their “fair value estimate for spot continues to edge lower, reflecting improved CAD fundamentals,” with the “estimated equilibrium” for USD/CAD sitting “at 1.3930.”

From a technical perspective, Scotiabank maintains a “bearish—CAD” stance, observing that while “CAD technicals remain choppy” there is “stronger evidence emerging that the CAD is better positioned to reverse more of its May/June decline.” They underline that “USD/CAD closed bearishly on the week through last Friday and short-term (daily) oscillators are tilting USD-bearish.” In terms of levels, they judge that “a push under 1.3970/80 (former high/retracement support) should pave the way for spot to move back to a 1.38 handle,” and conclude that “technicals suggest fading moderate USD gains to the 1.41 zone.”