USD/CAD dives to fresh yearly lows under 1.2700 as stimulus hopes trigger risk-on

USD/CAD has been pushing to the south on Tuesday and dove to fresh yearly lows beneath the 1.2700 level in recent trade. An increasingly risk on market feel, as well as technical selling has been driving the pair lower. USD/CAD now trades pretty much bang on 1.2700 with losses on the day of around 60 pips or 0.5%, with the pair having now completed a 100 pip reversal from Monday highs and trading at its lowest level since April 2018.

Buoyant crude oil and equity markets spur loonie upside

US equity markets have been seeing upside in recent trade (the S&P 500 trades over a percent higher on the day near 3690), while WTI trades just below post-pandemic highs around $47.50 up nearly 1.0% on the day. CAD has a strong positive correlation to both asset classes and is thus seeing upside in tandem, while safe-haven USD is seeing downside. This is, of course, not a good combination for USD/CAD, hence its recent drop.

Optimism that the Republicans and Democrats will be able to reach a deal on further Covid-19 aid seems to be giving a sentiment a boost. In terms of the latest, US Speaker of the House Nancy Pelosi (leader of the Democrat’s majority in the House) will speak with Republican Senate Majority Leader Mitch McConnell and the House and Senate Minority Leaders Chuck Schumer and Kevin McCarthy to discuss finalising government funding and Covid-19 relief at 21:00GMT.

Ahead of this crucial meeting, a report by Politico citing negotiation insiders fed into the optimistic feeling; sources said Pelosi and McConnell will not wrap up for the year until a Covid-19 deal is put together.

Meanwhile, markets have shrugged off bad news from Europe and the US regarding lockdowns (Italy is looking likely to join Germany and the Netherlands in imposing tighter restrictions over Christmas and speculation about a New York City lockdown after Christmas is growing).

BoC speak incoming…

Last week, BoC Deputy Governor Beaudry made some interesting comments, in which he outlined that the bank could cut rates further without going into negative territory if the economy went into a persistent downturn, before adding that other easing options included expanding its QE programme or employing yield-curve targeting. Moreover, in the Q&A following his initial speech, Beaudry was pressed on whether the bank is actively considering lowering rates, to which he replied that though nothing has been decided yet, this is a potential option and the bank is thinking about it. Beaudry was also asked during the Q&A about how concerned he is regarding the strength of CAD. He replied that the exchange rate is very important for the outlook and that CAD strength is one element that the BoC is looking at when it puts together its January MPR.

Net-net, despite the lack of any negative reaction in CAD at the time, Beaudry did seem open the door to further BoC easing in January which, by the sounds of it, might motivating at curbing recent CAD strength. If not, why would he make further easing the main topic of his speech? Traders will be on notice for any comments regarding the prospect of further rate cuts or on CAD valuation from the BoC Governor himself when he speaks at 19:30GMT.

Technical selling adds to USD/CAD’s woes

Downside in USD/CAD as a result of fundamentals driven risk on is being exacerbated by technical selling; USD/CAD broke to the downside of a medium-term pennant, as described in an earlier article on the pair. Traders might now look for a retracement back to the upside, meaning that last week’s low at 1.2707 will be important to watch as resistance, as will last Friday and Monday’s lows at 1.2720.