- The renewed buying of the USD helped the USD / CAD to bounce off the support of the descending channel.
- Bullish crude oil prices continued to prop up the loonie and capped the rise.
- Diluted liquidity during the holidays also prevented traders from positioning themselves for a further recovery.
The pair USD / CAD it turned sideways heading into the American session and was last seen trading at the 1.2470-75 zone, almost unchanged for the day.
The pair found some support near the lower limit of a three-week downtrend channel and bounced around 25-30 pips from more than two-month lows amid renewed buying of US dollars. Expectations that the Fed will start rolling back its pandemic-era stimulus as early as November continued to act as a tailwind for the dollar.
The US dollar was also supported by mounting bets for an interest rate hike in 2022, bolstered by concerns that the recent surge in crude oil and energy prices will fuel inflation. The combination of factors pushed the yield on the 10-year US government bond to a four-month high, past the 1.60% threshold on Friday.
Meanwhile, fears of a return to stagflation (high inflation and low growth) dampened investors’ appetite for perceived riskier assets. This was evident by a softer tone in equity markets, which was seen as another factor that benefited the safe-haven dollar and extended some support to the USD / CAD pair.
However, the advantage remains limited amid high crude oil prices, which tend to prop up the commodity-linked Canadian dollar. This, coupled with relatively tight liquidity conditions following a bank holiday in the US and Canada, could contain any significant rally for the USD / CAD pair, at least for the time being.
This makes it prudent to wait for a strong follow-up buy before confirming that the USD / CAD pair has bottomed out in the near term and positioning for further gains. Therefore, any subsequent bullish movement is more likely to face strong resistance near the key psychological 1.2500 mark, followed by the very important 200-day SMA.
Technical levels
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