USD/CAD back to 1.2700 level after bouncing at 50DMA, though loonie retains underlying strength as oil rises

USD/CAD has risen back to the north of the 1.2700 level again having found support in recent trade just above its 50-day moving average at 1.2664. The pair is still trading with reasonable losses on the day of around 0.3% or just over 30 pips, as FX markets adopt a significantly more risk-on posture on Tuesday. That compares to Monday’s more defensive/risk-off bias that saw USD/CAD rally as high as 1.2780, with the 21-day moving average, which as at the time close to 1.2790, coming in to provide resistance. From a technical perspective, USD/CAD is currently locked between a 1.2660-1.2780ish range, with weekly extremes at either end of this range combined with the 50 and 21DMAs likely to act as support and resistance and make a breakout more difficult.

Oil prices hit fresh multi-week highs on Tuesday, with WTI pushing above $77.50 earlier in the session, providing support for the loonie. OPEC+’s decision to press ahead with a 400K barrel per day output hike in February amid an upbeat take on the outlook for demand seemed to instil some optimism in oil markets. There is clearly potential for more gains on the cards as market participants bid economically sensitive stocks and long-term yields higher in a vote of confidence in the economic outlook for 2022 and beyond. That suggests downside risks for USD/CAD, so bears might be looking for a test of December lows in the low-1.2600s at some point in the coming days/weeks.

But this might be a tall order as FX strategists have been noting upside risks to the dollar this week. Wednesday’s December Fed meeting minutes are likely to include hawkish chatter about the potential for quantitative tightening in 2022 once rate hikes are underway. Meanwhile, further US data later this week (ISM services PMI and the official jobs report) are unlikely to alter the prevailing narrative that the US economy is in a state of strong growth, high inflation (though this is expected to ease in 2022) and seeing a very tight labour market.