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  • USD/CAD is probing weekly lows around the 1.2700 level again as USD weakens.
  • Amid a lack of incoming notable Canadian economic events, the loonie is set to take its cue from the dollar.

USD/CAD is back to trading just to the north of the 1.2700 level, having reversed from Wednesday highs above 1.2790 in the immediate aftermath of the Fed rate decision. The loonie is benefitting from a weaker USD and USD/CAD is currently trading around 40 pips or 0.3% lower on the day.

Loonie takes its cue from US dollar dynamics

There has not been much to speak of regarding Canadian fundamentals thus far this session, aside from stale November ADP Nonfarm employment change that showed the economy adding 40.8K jobs over the course of the month (the official November labour market report released on 4 December showed the country adding 62K jobs). Thus, the loonie is largely trading as a function of US dollar/risk appetite dynamics, now that the pricing in of a more dovish sounding BoC has already occurred (this was why CAD underperformed on Wednesday).

Indeed, US dollar and risk appetite dynamics are most certainly proving favourable for the loonie on Thursday, insofar as USD weakness has driven the loonie back to the 1.2700 handle, an impressive turnaround after the pair hit highs in the 1.2790s for the third time this week in the immediate aftermath of Wednesday’s Fed monetary policy announcement.

The US dollar (and by virtue USD/CAD) is being driven lower by a few factors including 1) Fed Chair Powell’s dovish tone in the post-meeting press conference, 2) a continued pumping of hopes that deals can be reached on further US Covid-19 aid and a Brexit deal and 3) recently released soft US labour market and manufacturing survey numbers which have triggered increased bets for more Fed stimulus in January. As a result, the Dollar Index (DXY) has slumped below the 90.00 level for the first time since April 2018.

USD/CAD stays within weekly range for now

For now, USD/CAD has been unable to break to the south of the 1.2690ish-1.2790ish range that has prevailed for much of the week so far. The top of this range has now been tested 3 times, and the bottom of the range twice. Should USD continue to weaken, however, further downside and a break to the south is likely.

USD/CAD hourly chart