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  • USD/CAD has for the most part stayed below the 1.2800 level on Wednesday, aided by strong crude oil prices.
  • Comments from BoC’s Schembri about the bank mulling tolerating an inflation overshoot have gone largely ignored.

USD/CAD has for the most part stayed below the 1.2800 level on Wednesday, with resistance in the form of the 50-day moving average at 1.27967 also helping to keep the price action under wraps. Right now, USD/CAD is trading in the 1.2760s and eyeing a test of Tuesday lows.  Break below these lows would open the door to a further move to the south and a test of last Friday’s low just under 1.2740, which happens also to coincide with the pair’s 21-day moving average. On the day, the loonie trades with modest gains of about 0.1% versus its US dollar counterpart and USD/CAD is down about 10 pips.

Driving the day

USD/CAD paid very little attention to tier one US data releases on Wednesday; for reference, ADP National Employment, a private proxy for the official headline NFP number, beat expectations to come in at 174K (forecasts were for a gain of 49K jobs), while ISM Services PMI also beat expectations, coming in at 58.3 versus consensus forecasts for 57.4. The ISM Services PMI report also contained very strong subindex numbers, most notable of which was a jump in the employment index to 55.2 from 48.7 in December (which bodes well for Friday’s NFP number).

Rather, in recent trade anyway, the pair has taken its cue much more from rising crude oil markets; WTI has rallied into the $56.00s, up nearly 3% on the day amid a cocktail of usual bullish themes including; pandemic optimism (the latest updates out of the US suggest the country is now administering over 1.3M jabs per day and the CDC said the virus is now in a downwards trajectory), growing US stimulus hopes and further indications of strong OPEC+ adherence to agreed supply cuts (Russian Deputy PM Alexander Novak reiterated that the country will aim for 100% compliance).

Meanwhile, a further boost has come in the form of the EIA’s weekly inventory update; crude oil stocks posted a surprise drop of nearly 1M barrels versus forecasts for a 446K barrel build, confirming bullish private weekly API inventory data from overnight.

Comments from Bank of Canada Deputy Governor Lawrence Schembri that the bank is mulling whether or not to tolerate an inflation overshoot appear to have gone relatively unnoticed; the bank is currently conducting its monetary policy framework review (scheduled to conclude at the end of the year). Many expect the bank to follow in the footsteps of the Fed and announce some kind of average inflation targeting regime (which implies that after a period of inflation undershooting the BoC’s target, they would tolerate an overshoot). The policy shift is a dovish one, and this is something that could hurt CAD as the year gets underway.

USD/CAD key levels