USD/CAD sets fresh weekly lows around 1.3050 amid friendlier risk flows

• Improving risk appetite/higher crude prices has pushed USD/CAD back to fresh lows on the week around 1.3050.
• Amid soft USD conditions, the loonie eyes further downside and a test of 1.3000.

USD/CAD has slipped back to fresh lows of the week of around 1.3050 in recent trade, the pair now nursing losses of over 50 pips or 0.4% on the day.

CAD tracks risk sentiment, crude prices

Wednesday’s European session saw an improvement in risk appetite following Tuesday’s more risk-off tone, with major European equity bourses closing with reasonable gains on the day and moving back towards recent highs, and crude oil markets also making solid upwards strides. US equities also trade with gains, albeit more modest.

The improvement in sentiment has given the more risk-sensitive currencies (CAD included) a boost, and was in part assisted by another vaccine update from Pfizer late in the European morning session; the US pharmaceutical giant announced that final Phase 3 trial results showed the vaccine to be 95% effective (versus the prior estimate that the vaccine was 09% effective) and this is consistent across ages and ethnicities.

Stronger than expected Canadian inflation numbers for October, released at 13:30GMT, failed to provoke much of a positive reaction at the time. As with earlier UK CPI data, inflation in Canada remains well below the Bank of Canada’s 2% target.

With Canadian data out of the way, the loonie is set to continue to trade as a function of broader themes and risk appetite ahead of Canadian retail sales on Friday.

USD/CAD set to continue gradual decline amid soft US dollar conditions

USD continues to lose ground, with the Dollar Index trading down by roughly 0.2% or just 20 points on the day, driven lower by the market’s still broadly buoyant appetite for risk, as well as recent dovish Fedspeak from FOMC Chairman Powell, Vice Chairman Clarida and more. On which note, Wednesday night’s slate of Fed speakers are likely to reiterate a dovish message of 1) pessimism over the near-term outlook for the economy, 2) the need for fiscal stimulus and 3) the fact that ultra-easy monetary policy and credit facilities are going nowhere soon, with the Fed maintaining the option to do more if needed.

Thus, USD looks set for further downside and CAD, given its risks sensitive properties, looks set to be a beneficiary of this.

Technically speaking, the picture also looks quite dovish; USD/CAD has been trending lower within a bearish trend channel over the past few days (since it rejected a test of its 21DMA to the upside at 1.3150 last Friday). The next key area of support to the downside is the psychological 1.3000 area, followed by earlier November lows of just under 1.2950.

If the USD/CAD bulls can make a comeback and push the cross back beyond 1.3100 and force a break out of the pair’s recent downwards trend channel, the door will be opened to a test of weekly highs around 1.3120 and then the pair’s 21-day moving average at 1.3144.

USD/CAD four-hour chart