USD/CAD sees choppy trade, back from 1.2780 highs to under 1.2750

• USD/CAD has seen two-way trade on Monday
• The pair rallied as high as 1.2780 from earlier sub-1.2700 lows but is now under 1.2750 again.
• Contributing to mixed trade in CAD is choppy/indecisive crude oil markets.

USD/CAD has seen two-way trade on Monday but has been on the front foot in recent trade, advancing from Asia Session lows under the 1.2700 level to hit highs just under 1.2780. The last 30 pips of this rally from daily lows to daily highs happened in a surge shortly after the 4 pm London Fix and quickly pared; the currency pair is now consolidating under the 1.2750 mark and is back to pretty much trading flat on the day again.

The loonie has now completely eroded its post-Bank of Canada rate decision gains from last week and continues to eye the fallout of the Biden administration’s decision to revoke the Keystone XL permit’s license to cross the border into the US on environmental grounds. Canada PM Justin Trudeau and US President Joe Biden agreed to meet next month, where the Keystone XL pipeline will likely come up as a topic, though the focus of the meeting is most likely to be on the two countries’ wide-ranging co-operation and efforts to contain the pandemic.

Another topic likely to be discussed is the Biden Administrations' new “buy American” initiative; the US President is expected to sign an executive order on Monday forcing federal procurement contracts to increase their domestic content. The Canadian Finance Minister said he was concerned by the provisions and said the question of free trade would be high on the agenda.

Indecisive crude oil markets, indecisive loonie

Contributing to mixed trade in CAD is choppy/indecisive crude oil markets. The crude complex has swung between positive and negative territory on Monday, caught between conflicting narratives. Weighing on the complex is the risk of further lockdowns (i.e. in France) and delays to vaccines, which are raising concerns over a more sluggish than previously anticipated Eurozone recovery. Meanwhile, the US and UK are expected to act to restrict international travel amid an effort to reduce their risk of importing foreign strains of Covid-19, which will damage fuel demand, and the EU is looking at cracking down on intra-EU movement. Concerns also continue to bubble about the (albeit slowly) increasing rate of spread of the virus in China, the world’s largest oil importer. The latest developments are challenging the prior, bullish narrative focused on a strong economic recovery driven by vaccines.

On the supply side, Iraq has said that it will produce 3.6M barrels of oil per day over January and February to compensate for the overproduction from the country over much of last year. “If Iraq manages to reduce output to these levels, it would be the lowest output we have seen from them since 2015” notes ING, before caveating that “given Iraq’s record of falling short with production cuts, there is no guarantee that they will meet this target”.

USD/CAD testing top of long-term downtrend

USD/CAD tested the top of a long-term downtrend (linking the mid/late November, late December and January highs) in recent trade. The pair faked a breakout when it briefly shot as high as the 1.2780 mark, and is now trading back under the downtrend and under the 1.2750 mark, implying that (for now) the long-term downtrend remains intact. A break above this downtrend, which is highly possible, would open the door to a test of the 1.2800 level (the high of 18 January) and then the pair’s 50-day moving average at 1.2838.