**USD/CAD Strengthens to Three-Month Highs Near 1.3900 Amid Rising US Yields and Canadian Labor Weakness**
*Adapted and expanded from the original article by Anil Panchal for FXStreet*
The US dollar has continued its upward trajectory against the Canadian dollar, with the USD/CAD currency pair reaching a new three-month high near the 1.3900 level during trading on August 20, 2024. The pair has been supported by growing divergence in monetary policy outlooks between the US Federal Reserve and the Bank of Canada (BoC), along with softening Canadian economic indicators and risk-off sentiment in global markets.
This bullish momentum is also bolstered by rising US Treasury yields and demand for safe-haven assets, contributing to strong bidding for the dollar compared to its G10 counterparts. At the same time, disappointing Canadian job market data and weak retail sales have weighed on sentiment toward the loonie.
Below is a detailed breakdown of the drivers behind the USD/CAD rally and its potential direction in the coming months.
## Technical Overview: USD/CAD Pushes Past Resistance Levels
– USD/CAD has surged toward the 1.3900 zone, trading near levels not seen since May 2024.
– Technical momentum favors further gains after bulls cleared important resistance levels.
– The pair has seen consistent upside over the past several weeks, finding support above 1.3600.
– A successful breach above 1.3750, a key resistance zone from earlier in the year, opened the path toward the 1.3900 area.
– The US dollar’s strength appears intact, with the US Dollar Index (DXY) hovering above the 104.50 mark.
– Momentum indicators such as the Relative Strength Index (RSI) suggest the pair may be entering overbought territory, but without a decisive bearish catalyst, dips could be limited.
## Key Factors Driving USD/CAD Rally
Several intertwined macroeconomic and market factors are underpinning USD/CAD’s rally:
### 1. **US Dollar Strength Backed by Rising Treasury Yields**
– The yield on the benchmark 10-year US Treasury note rose above 4.30%, approaching its June highs. Rising yields tend to attract capital inflows into US assets, driving the dollar higher.
– Hawkish comments from Federal Reserve officials have led markets to reconsider the timeline for the Fed’s rate cuts.
– Fed Governor Michelle Bowman recently stated that additional rate hikes might still be necessary should inflation remain above target for an extended period.
– High interest rates in the US continue to support the dollar as a relatively high-yielding currency.
### 2. **Canadian Economic Weakness**
– Canada’s latest employment figures showed a loss of 6,400 jobs in July, while the unemployment rate climbed to 5.7% from 5.5%.
– Canadian retail sales data also disappointed, growing by only 0.1% in June, suggesting that consumer spending is slowing in the face of high borrowing costs.
– The Canadian economy has shown signs of losing momentum, increasing expectations that the BoC may pause or begin cutting rates sooner than the Fed.
According to the latest data from Statistics Canada:
– Employment in services-producing industries declined significantly.
– Wage growth, while still positive, slowed compared to earlier in the year.
### 3. **Diverging Monetary Policy Outlooks**
– The BoC raised its policy rate to 5.00% in July 2024 but signaled caution about further hikes as inflation began to cool.
– BoC Governor Tiff Macklem stated that while the bank remains data-dependent, the bar for additional tightening is high.
– By contrast, US central bankers continue to express concern about sticky core inflation, keeping the policy bias tilted toward a potential hike or prolonged restrictive stance.
### 4. **Risk-Off Sentiment Supports the US Dollar**
– Global equity markets have experienced volatility
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