USD/CAD climbs to multi-day peak amid tumbling Oil prices, resurgent USD demand

The USD/CAD pair catches fresh bids on Wednesday and climbs to a four-day high, around the 1.3425 region during the first half of the European session. Spot prices, for now, seem to have found acceptance above a technically significant 200-day Simple Moving Average (SMA) and draw support from a combination of factors.

A combination of factors weighs heavily on the Canadian Dollar, which, along with a modest US Dollar (USD) uptick act as a tailwind for the USD/CAD pair. Despite falling US inventories and strong Chinese economic data, Oil prices dive to a fresh monthly low amid worries that rising borrowing costs will slow economic growth and dampen fuel demand. Apart from this, signs of cooling consumer inflation in Canada undermine the commodity-linked Lonie.

The USD, on the other hand, draws support from a further rise in the US Treasury bond yields, bolstered by the prospects for further policy tightening by the Federal Reserve (Fed). In fact, the markets have nearly fully priced in a 25 bps lift-off in May and the Fed funds futures indicate a small chance of another rate hike in June. This, in turn, pushes the yield on the benchmark 10-year US government bond and the rate-sensitive two-year Treasury note to a multi-week high.

The latest leg up, meanwhile, confirms a breakout through the 200-day SMA, which, along with the aforementioned supportive 
fundamental backdrop suggests that the path of least resistance for the USD/CAD pair is to the upside. In the absence of any relevant market-moving economic data on Wednesday, either from the US or Canada, investors will focus on the release of the Fed’s Beige Book, due later during the US session, for the central bank’s take on the state of the US economy.

This, along with the US bond yields, will drive the USD demand and provide some impetus to the USD/CAD pair. Traders will further take cues from the official US Crude inventory report by the Energy Information Administration (EIA), which should influence Oil price dynamics and contribute to producing short-term opportunities around the major.

Technical levels to watch