- USD/CAD witnessed an intraday pullback from the new yearly high hit earlier this Tuesday.
- Boosting risk appetite, falling US bond yields caused some profit taking around the pair.
- Falling oil prices could undermine the Canadian dollar and limit losses amid the Fed’s aggressive rate hike bets.
The pair USD/CAD dipped early in the American session and dropped to a fresh daily low around the 1.2980-1.2975 region in the last hour.
Spot prices struggled to capitalize on modest intraday gains and started to pull back from the 1.3035 region, or the highest level since November 2020 reached on Tuesday. The drop lacked an obvious fundamental catalyst and could only be attributed to some profit taking after recent strong gains of over 300 pips posted in the last three days or so.
The corrective decline, however, remains muted amid a weaker tone around crude prices, which tend to undermine the commodity-linked Canadian dollar. Oil prices added to sharp declines the day before amid gloomy prospects for global fuel demand, buoyed by rising recession risks and strict coronavirus-induced lockdowns in top oil importer China.
In addition, a delay in passing the European Union’s proposed phased embargo on Russian oil, amid requests for exemptions and concessions from Eastern European members, also undermined the commodity. Reports indicate that a new version is currently being drafted and could remove the ban on EU tankers carrying Russian oil after pressure from Greece, Cyprus and Malta.
On the other hand, retreating US Treasury yields and risk-on markets prevented traders from placing further bullish bets on the safe-haven US dollar. That said, the prospects for more rapid policy tightening by the Fed should continue to act as a tailwind for the dollar, warranting some caution before positioning for deeper losses.
In fact, markets seem convinced that the Fed would need to take more drastic action to combat stubbornly high inflation and has been pricing in a further 200bp rate hike for the rest of 2022. So the focus remains on the release of the latest US consumer inflation figures on Wednesday, which will play a key role in boosting USD demand.
Meanwhile, the USD remains at the mercy of US bond yields and broader market risk sentiment amid the absence of relevant economic releases in the market. Aside from this, the oil price dynamics should give the USD/CAD pair some momentum and allow traders to take advantage of some short-term opportunities.
Technical levels
Source: Fx Street
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