USDCAD remains above 1.3450 amid falling oil prices

• USDCAD gets some offers on Wednesday and is supported by a combination of factors.
• The decline in oil prices weakens the Loonie and acts as a tailwind amid new dollar purchases.
• The recent break below the 50-day SMA warrants some caution for bullish traders.

The pair USDCAD It attracts some buying on Wednesday and is based on the previous day’s late bounce from its lowest level since September 21. The pair remains above 1.3450 during the first half of the European session and is supported by a combination of factors.

Crude Oil prices have added to heavy overnight losses and are seen for a second consecutive day lower, which, in turn, is seen undermining the Commodity-linked Loonie. Oil’s losses stem from investor concern that China’s zero-COVID policy could reduce fuel demand in the world’s top crude importer. Additionally, the American Petroleum Institute reported Tuesday that US inventories grew by 5.6 million barrels in the week to Nov. 4, further reflecting falling demand and continuing to weigh on the black liquid. This, along with the appearance of some buying around the dollar, acts as a tailwind for the USDCAD pair.

Despite the fading odds of a more aggressive Fed tightening, markets are pricing in at least a 50 basis point rate hike in December. This continues to be supported by rising US Treasury yields and offers some dollar support. Aside from this, a generally weaker tone around equity markets is helping the safe-haven dollar stem its recent slide to a multi-week low. However, the USDCAD’s upside potential seems limited amid the post-NFP break below the 50-Day Simple Moving Average (SMA), fundamental support near the psychological 1.3500 mark.

From a technical point of view, the outlook remains precarious. On Tuesday there was a break below the neckline of what looks like a head and shoulders pattern that has been forming since late September. Tuesday’s volatility break reached a low of 1.3380 before easing off. Wednesday’s activity has been a rally to the upside as the US dollar has risen again. The price has almost reached the neckline again at the top of 1.34. The question is whether this is a pullback move for one last ‘air kiss’ and continuation lower or if the breakout was a bear trap… A move back below Tuesday’s lows would confirm a drop to substantially lower targets. Taking the height of the pattern as a guide, a target as low as 1.3030 is suggested, while a more modest extension target of 61.8% would see the price fall to 1.3210. A move above the neckline would reduce the chances of a break. A break above 1.3750 would nullify them.

Market Participants may refrain from making aggressive bets and prefer to stay on the sidelines pending the release of US consumer inflation figures on Thursday. Therefore, it will be prudent to wait for strong follow-on buying before confirming a short-term bottom and positioning for further gains. In the absence of any major US economic releases, speeches from New York Fed President John Williams and Richmond Fed President Thomas Barkin could give the USDCAD a bit of a boost later in the beginning of the American session.

Technical levels to follow