USD / CAD returns initial gains and falls back near the 1.2600 level

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  • USD / CAD gained traction for the second day in a row on Friday.
  • Some buying around the USD continues to support the bullish movement of the pair.
  • Falling oil prices weighed on the CAD and provided a modest boost to the upside in the pair.

The pair USD / CAD has fallen around 50 pips from daily highs near 1.2645 established during the Asian session and falls back near the 1.2600 level. At the time of writing, the pair remains negative and close to its daily lows, around 1.2595.

A combination of factors has helped the pair gain traction for the second day in a row on Friday and take advantage of the previous day’s solid bounce of around 150 pips from the three-year lows, around the region of 1.2470-65. The US dollar has extended the strong gains of the previous day, led by a strong rally in US Treasury yields.

The US bond market has reacted strongly to the Progress of Massive US Fiscal Spending Plan and Impressive Rate of COVID-19 Vaccination Worldwide. Reflation trading, together with rising inflation expectations, boosted the performance of the US 10-year benchmark bond beyond 1.50%, at one-year highs, and propped up the USD.

Meanwhile, the runaway rally in US bond yields has raised fears about difficulties in other assets and unleashed a new global wave of risk aversion. This has been evident by a weaker business sentiment around stock markets, which has provided an additional boost to the safe haven US dollar.

On the other hand, falling crude oil prices have affected demand for the loonie, currency linked to the prices of raw materials, and has extended additional support to the USD / CAD pair. The prevailing sentiment of risk aversion and the strength of the USD has led investors to lighten their bullish positions amid expectations that the rebound in oil prices could lead to higher supply in the market.

Having said that, a modest pullback in US bond yields has prevented USD bulls from opening new positions and limited any further gains for the USD / CAD pair, at least for the moment, generating the current retracement of the pair.

From a technical perspective, inability to capitalize on momentum warrants some caution for bulls. This makes it prudent to wait for a strong continuation buy above the 1.2655 resistance zone before confirming that the USD / CAD has bottomed in the short term and positioning for any further bullish movements.

Market participants are now awaiting the US economic calendar, which features the release of the underlying PCE price index, the goods trade balance, and the Chicago PMI. Aside from this, US bond yields and general market risk sentiment will influence USD price dynamics. This, in turn, could generate some short-term trading opportunities around the USD / CAD pair.

USD / CAD technical levels

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