USD/CAD pares intraday gains, up little around 1.2610 region

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  • USD/CAD gained traction for the second consecutive session on Friday.
  • Some follow-through USD buying remained supportive of the move up.
  • Retreating oil prices undermined the loonie and provided a modest lift.

The USD/CAD pair retreated around 35-40 pips from daily tops and was last seen trading with modest gains, around the 1.2610-15 region.

A combination of factors assisted the pair to gain traction for the second consecutive session on Friday and build on the previous day’s solid rebound of around 150 pips from three-year lows, around the 1.2470-65 region. The US dollar added to the overnight strong gains, led by a sharp spike in the US Treasury bond yields.

The US bond market has been reacting strongly to the progress on a massive US fiscal spending plan and the impressive pace of COVID-19 vaccinations globally. The reflation trade, along with rising inflation expectations pushed the yield on the benchmark 10-year US bond beyond 1.50%, or more than one year high and underpinned the USD.

Meanwhile, the runaway rally in the US bond yields raised fears about distressed selling in other assets and triggered a fresh wave of the global risk-aversion trade. This was evident from a weaker trading sentiment around the equity markets, which provided an additional boost to the greenback’s relative safe-haven status.

On the other hand, retreating crude oil prices dented demand for the commodity-linked loonie and extended some additional support to the USD/CAD pair. The prevalent risk-off environment and a broad-based USD strength prompted traders to lighten their bullish positions amid expectations that rallying oil prices could lead to more supply in the market.

That said, a modest pullback in the US bond yields held the USD bulls from placing fresh bets and kept a lid on any further gains for the USD/CAD pair, at least for the time being.

From a technical perspective, the pair’s inability to capitalize on the momentum warrants some caution for bullish traders. This makes it prudent to wait for some strong follow-through buying beyond the 1.2655 supply zone before confirming that the USD/CAD pair has bottomed out in the near-term and positioning for any further appreciating move.

Market participants now look forward to the US economic docket, featuring the releases of Core PCE Price Index, Goods Trade Balance and Chicago PMI. Apart from this, the US bond yields and the broader market risk sentiment will influence the USD price dynamics. This, in turn, might produce some short-term trading opportunities around the USD/CAD pair.

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