USD/CAD rallies beyond 1.40 amid notable USD demand, tumbling oil prices

The USD/CAD pair built on the previous day's positive move and gained some follow-through traction for the second straight session on Friday. The momentum extended through the early European session and lifted the pair further beyond the key 1.40 psychological mark.

Having shown some resilience ahead of the 1.3850 support area, the pair staged a goodish recovery from multi-week lows set on Tuesday. The uptick was supported by a goodish pickup in the US dollar demand and a fresh leg down in crude oil prices, led by worsening US-China relations.

China's decision to impose new Hong Kong security law fueled concerns over a further escalation in diplomatic tensions between the world's two largest economies. This, in turn, took its toll on the global risk sentiment and benefitted the greenback's perceived safe-haven status.

This comes on the back of growing fears about the second wave of coronavirus infections. Adding to this, China refrained from providing its annual economic growth target for 2020 and raised uncertainty over crude oil demand in the world's second-largest economy.

The market nervousness was evident from a steep intraday decline of around 7% in crude oil prices. The downbeat mood in the oil markets weighed heavily on the commodity-linked currency – the loonie – and remained supportive of the strong bid tone surrounding the USD/CAD pair.

Meanwhile, possibilities of some short-term trading stops being triggered on a sustained strength beyond a three-day-old trading range resistance, around the 1.3970 area, further contributed to the pair's strong momentum on the last trading day of the week.

It will now be interesting to see if the bulls are able to capitalize on the momentum or the USD/CAD pair meets with some fresh supply at higher levels. Investors now look forward to Friday's release of Canadian retail sales data for some short-term trading impetus.

Technical levels to watch