USD/CAD Outlook: Dips could be seen as buying opportunity amid weakening CAD-oil correlation

The USD/CAD pair prolonged its recent bullish trend witnessed over the past one week or so and gained strong follow-through traction for the fourth successive day on Tuesday. The momentum pushed the pair to a new 2022 high, around the 1.2900 round figure and seemed unaffected by bullish crude oil prices, which tend to benefit the commodity-linked loonie. As investors assessed the impact of a worsening conflict in Ukraine, a new US ban on Russian oil and other energy imports pushed the black liquid to its highest level since 2008.

The move was matched by Britain, announcing that it would phase out the import of Russian oil imports by the end of 2022. The EU also published plans to cut its reliance on Russian gas by two-third within a year. The market players, however, appear more concerned about the rapidly deteriorating global economic outlook amid growing worries of a major inflationary shock. This, in turn, continued weighing on the risk sentiment and benefitted the US dollar's status as the global reserve currency, which acted as a tailwind for the pair.

The price action reflects that the historic link between the Canadian dollar and energy prices has weakened. In fact, the 3-month rolling correlation between the Canadian dollar and oil has fallen to 0.3 from 0.9 in December, suggesting that the focus will remain glued to developments surrounding the Russia-Ukraine saga. In the meantime, signs of stability in the equity markets held back the USD bulls from placing aggressive bets and failed to assist the pair to build on the overnight strong move up, at least for the time being.

In the absence of any major market-moving economic releases, either from the US or Canada, the broader market risk sentiment will drive demand for the safe-haven USD. Apart from this, oil price dynamics might provide some impetus to the pair. Investors this week will also take cues from important macro data - the US consumer inflation figures on Thursday and Canadian monthly jobs report on Friday. The data might do little to force the Fed of the Bank of Canada to shift their current guidance, though might infuse some volatility.

Technical outlook

From a technical perspective, the overnight move beyond the February peak, around the 1.2875-1.2880 region, could be seen as a fresh trigger for bullish traders. Some follow-through buying beyond the 1.2900 mark will reaffirm the constructive outlook and pave the way for a further near-term appreciating move. With technical indicators on the daily chart holding in the positive territory, the pair seems poised to accelerate the momentum to challenge the 2021 high, around the 1.2960-1.2965 region touched in December. Bulls might eventually aim to reclaim the key 1.3000 psychological mark for the first time since December 2020.

On the flip side, any meaningful corrective slide now seems to find decent support near the 1.2815-1.2810 region. This is closely followed by the 1.2800 mark, which if broken might prompt some long-unwinding. That said, any subsequent decline could be seen as a buying opportunity and remain limited near the 1.2775-1.2765 strong horizontal resistance breakpoint, now turned support. The latter should act as a strong near-term base for the pair and a pivotal point for traders.