- USD/CAD gained some positive traction on Monday, although it lacked follow-up buying.
- The drop in crude oil prices undermined the Canadian dollar and extended support amid a stronger USD.
- The Fed’s dovish outlook, rising US bond yields and a risk-off mood benefited the dollar.
The pair USD/CAD it maintained its bid tone heading into the American session and was last seen trading just a few pips below the daily high, around the 1.2630-1.2625 area.
A combination of factors helped the USD/CAD pair build on last week’s nice bounce from the 1.2520 area and gain traction for the third day in a row on Monday. A modest pullback in crude oil prices weighed on the commodity-linked Canadian dollar and extended support to spot prices amid sustained US dollar buying interest.
Crude oil pulled back from a three-week high after data from China signaled economic weakness and fueled concerns about slowing demand amid COVID-19 restrictions. That said, concerns about tight global supply and a potential European Union (EU) embargo on Russian gas helped limit the black liquid downside, at least for now.
On the other hand, the USD remained high near a two-year high and continued to receive support from expectations of more aggressive policy tightening by the Federal Reserve. Investors seem convinced that the Fed would raise rates at a faster pace to curb runaway inflation. This, along with high yields on US Treasuries, supported the dollar.
Against the backdrop of the Fed’s dovish outlook, concerns that the worsening Ukraine crisis will put upward pressure on already high inflation pushed US bond yields to a new multi-year high. . Aside from this, the risk-off mood, as shown by a weaker tone in equity markets, further benefited the safe-haven dollar.
That said, relatively weak liquidity conditions on the back of a European holiday prevented the bulls from making aggressive bets. The USD/CAD pair has, thus far, been struggling to find acceptance above the very important 200-day SMA, which, in turn, warrants some caution before positioning for any further appreciation moves in the short term.
There is no major market moving economic data to be released on Monday from either the US or Canada. Therefore, US bond yields, coupled with broader market risk sentiment, will play a key role in influencing USD demand. Traders will follow the signals from the oil price dynamics to take advantage of some short-term opportunities.
Technical levels
Source: Fx Street
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