- USD/CAD gained some positive traction on Monday and was supported by a combination of factors.
- Worries that rising COVID-19 cases could dent fuel demand weighed on oil and undermined the loonie.
- The cautious market mood drove some haven flows towards the USD amid the Fed’s hawkish outlook.
The USD/CAD pair held on to its intraday gains through the first half of the European session and was last seen hovering near its daily top, around the 1.2825-30 region.
A combination of factors assisted the USD/CAD pair to attract some buying on the first day of a new week and recover further from a one-week low, around the 1.2785 region touched on Friday. Uncertainty over the economic impact of surging coronavirus cases fueled worries that the imposition of fresh restrictions could dent fuel demand. This was evident from a downtick in crude oil prices, which undermined the commodity-linked loonie and extended some support to the major.
On the other hand, the cautious market mood – as depicted by a softer tone around the equity markets – drove some haven flows towards the US dollar. Apart from this, the Fed's hawkish outlook, indicating at least three rate hikes next year, acted as a tailwind for the greenback. This, in turn, was seen as another factor that provided a modest lift to the USD/CAD pair. That said, retreating US Treasury bond yields kept a lid on any meaningful gains for the buck and the USD/CAD pair.
Investors also seemed reluctant to place aggressive directional bets amid absent relevant fundamental catalysts and end-of-year thin market liquidity. This makes it prudent to wait for a strong follow-through buying before confirming that the recent corrective slide from the YTD high has run its course. Nevertheless, the fundamental backdrop seems tilted in favour of bullish traders and supports prospects for a further appreciating move for the USD/CAD pair.
Even from a technical perspective, the recent move up witnessed over the past two months or so, has been along an upward-sloping channel. This further points to a well-established short-term bullish trend and has validated the positive outlook. Hence, any meaningful dip could still be seen as a buying opportunity and is more likely to remain limited. A sustained break below trend-channel support, currently around the 1.2760 area, is needed to negate the bullish bias.
Technical levels to watch
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