- USD/CAD retests the multi-year top and draws support from a combination of factors.
- Political crisis in Canada overshadows an uptick in Oil prices and undermines the Loonie.
- Bets for a less dovish Fed and elevated US bond yields help revive demand for the USD.
- Canadian CPI eyed for some impetus ahead of the crucial FOMC decision on Wednesday.
The USD/CAD pair continues to attract buyers for the fourth straight day and retests its highest level since April 2020, around the 1.4270 area during the early part of the European session on Tuesday. This uptick is sponsored by a combination of factors, which suggests that the path of least resistance for spot prices is to the upside. In a shocking political development, Canada’s Deputy Prime Minister and Finance Minister Chrystia Freeland resigned on Monday, citing disagreements with Prime Minister Justin Trudeau over economic strategy and US tariff threats. This comes on top of the Bank of Canada's (BoC) aggressive policy easing and dovish outlook, projecting lower growth in the final quarter of this year, and undermines the Canadian Dollar (CAD). Apart from this, the emergence of some US Dollar (USD) buying, bolstered by bets for a less dovish Federal Reserve (Fed) and elevated US Treasury bond yields, acts as a tailwind for the currency pair.
Investors now seem convinced that the Fed will adopt a more cautious stance on cutting interest rates. The expectations were reaffirmed by the US macro data released on Monday, which showed that a big part of the economy expanded at the fastest pace in more than three years. In fact, the S&P Global flash US Services Purchase Managers Index (PMI) rose from 56.1 to 58.5 in December – the highest level in 38 months – and the Composite PMI surged from 54.9 in November to 56.6, or a 33-month high. This overshadowed a fall in the flash US Manufacturing PMI to a three-month low of 48.3 in December. Moreover, speculations that Trump's policies may lead to an increase in government borrowing, and boost inflation, lifted the yield on the benchmark 10-year US government bond to its highest level since November 22. Adding to this, persistent geopolitical tensions and trade war fears seem to offer additional support to the safe-haven Greenback.
Meanwhile, concerns about supply disruptions stemming from tighter sanctions on Russia and Iran assist Crude Oil prices to regain some positive traction after the overnight pullback from a multi-week high. This, however, does little to provide any respite to the commodity-linked Loonie, which, in turn, validates the near-term positive outlook for the USD/CAD pair. Traders, however, might refrain from placing aggressive bets ahead of the release of the latest Canadian consumer inflation figures, due later this Tuesday. Apart from this, the US monthly Retail Sales data could provide some impetus later during the early North American session. The market focus, however, remains glued to the outcome of the highly-anticipated two-day FOMC policy meeting on Wednesday. Investors will look for fresh cues about the Fed's rate-cut path, which, in turn, will drive the USD demand and determine the near-term trajectory for the currency pair.
USD/CAD daily chart
Technical Outlook
From a technical perspective, the Relative Strength Index (RSI) on the daily chart is flashing slightly overbought conditions and warrants some caution for bullish traders. Hence, any further move up is more likely to face stiff resistance near the April 2020 peak, around the 1.4300 neighborhood. Some follow-through buying, however, could lift the USD/CAD pair towards the next relevant hurdle near the 1.4360-1.4365 region, above which bulls might aim to reclaim the 1.4400 round figure for the first time since March 2020.
On the flip side, any corrective pullback now seems to find decent support near the 1.4200 mark. A subsequent fall could be seen as a buying opportunity near the 1.4155-1.4150 area. This, in turn, should help limit the downside for the USD/CAD pair near the 1.4100 mark. The latter should act as a strong near-term base, which if broken decisively might prompt some long-unwinding trade and pave the way for deeper losses.
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