USD/CAD Analysis: Post-BoC slump lacks follow-through amid sliding oil prices

The USD/CAD pair witnessed a dramatic intraday turnaround and nosedived nearly 200 pips from six-week tops in reaction to more hawkish forward guidance by the Bank of Canada (BoC). As was widely anticipated, the BoC left the policy rate unchanged at 0.25% and reduced its weekly asset purchases to C$3bn from $4bn amid an improving economic outlook. In the accompanying policy statement, the central bank brought forward its guidance for the first interest rate hike to the second half of 2022.

This, along with the emergence of some fresh selling around the US dollar, further contributed to the pair's steep decline to the lowest level since March 18. The USD struggled to capitalize on its early positive move and remained well within the striking distance of multi-week lows amid expectations that the Fed will keep interest rates near zero levels for a longer period. Apart from this, a positive opening in the US equity markets exerted some additional pressure on the safe-haven USD.

However, the ongoing slump in crude oil prices capped gains for the commodity-linked loonie and helped limit the downside for the major. Investors now seem worried that soaring COVID-19 cases in India – the world's third-biggest oil importer – and Japan will drive down fuel demand. The commodity was further pressured by a report that the US House Judiciary Committee has passed a bill that would open OPEC to antitrust lawsuits over production cuts and a surprise build in US crude oil supplies.

The pair recovered around 40 pips from intraday swing lows and held steady near the key 1.2500 psychological mark through the Asian session on Thursday. A weaker tone surrounding crude oil prices, to a larger extent, offset the prevalent USD selling bias and led to a subdued price action. Market participants now look forward to the release of US Initial Weekly Jobless Claims for some impetus later during the early North American session. Apart from this, the ECB-induced volatility might also influence the USD price dynamics and produce some trading opportunities.

Short-term technical outlook

From a technical perspective, the overnight rejection slide from a multi-month-old descending trend-channel resistance might have shifted the bias back in favour of bearish traders. That said, bullish resilience at lower levels warrants some caution. Moreover, the two-way price moves also point to indecision over the pair’s near-term trajectory, making it prudent to wait for some follow-through selling before positioning for any further depreciating move.

From current levels, the 1.2475-70 region, which is closely followed by the post-BoC swing lows near the 1.2460 region now seems to protect the immediate downside. Some follow-through selling will reaffirm the bearish bias and turn the pair vulnerable to accelerate the slide towards the 1.2400 mark. Bearish traders might eventually aim to challenge and drag the pair back towards multi-year lows support near the 1.2365 region.

On the flip side, the 1.2545-50 region now seems to act as immediate resistance. A sustained strength beyond has the potential to lift the pair back towards the 1.2600 mark. This is followed by the 1.2625-30 supply zone, or the top boundary of the ascending channel, which if cleared decisively will negate any near-term negative bias. The pair might then aim to reclaim the 1.2700 mark before eventually darting towards the next major hurdle near the 1.2740-50 region.