USD/CAD bulls have eyes set on higher highs, supported by market volatility

Markets hate uncertainty and volatility is here to stay, The US dollar is outperforming its G10 counterparts and the CAD is taking the brunt, weakening across the board while the CAD has weakened across the board. At the time of writing, USD/CAD is trading at 1.4222, +1.21%, having travelled from a low of 1.4058 to a high of 1.4271.

Bulls are back in the driving seat as the US dollar regains its foothold in a COVID-19 risk-off environment, at the expense of most of its G10 peers. DXY has been perky at the start of the week, attempting an extension of the end-of-month upside correction, oscillating through a 23.6% Fibonacci retracement of the late March sell-off.

The US dollar had attracted a safe-haven bid as well as an outright demand in money markets until major economic policy responses introduced to try to attenuate the impact of the COVID-19 pandemic on the economy set in, taking the DXY down from a few pips below the 103 handle to a low in the 98 handle. However, COVID-19 is a crisis like no other that the world has faced since the Spanish flu and while the size of the economic damage is still very uncertain, it is certain to be large.

US ISM Manufacturing: Orders and employment at their lowest level since 2009 tell the real story – Wells Fargo

Higher vol means dollar strength 

World trade and the commodity complex is taking the brunt of how governments have been forced into a hard place and a rock, with no choice but to sacrifice the global economy in order to reduce the spread of the invisible killer. Flattening the infection curve inevitably steepens the macroeconomic recession curve and this means the US dollar, for all of its sins, is still the healthies currency in the FX sick-bed.

Markets hate uncertainty and there is a whole lot of it around and is here to stay. For FX, COVID-19 implies higher volatility, weighs on higher yielders, pro-cyclicals, commodity-FX and this should equate to a stronger USD. Moreover, data released on Wednesday, showed the US Manufacturing ISM Index dropped modestly to 49.1, against expectations of a more significant decline. 

As for commodities, the CRB index is trading at the lowest levels since March 1999. This put s a focus on oil. The price of a barrel of the black gold has been testing below the $20 handle. The demand destruction and massive oversupply while momentum signals remaining firmly entrenched to the downside is likely to cap any advances which will continue to weigh on the CAD. 

USD/CAD levels