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  • USD/CAD has gradually nudged higher over the past few hours, as weakness in crude prices weighs on the loonie.
  • BoC Governor Macklem has been on the wires recently but failed to trigger a reaction from CAD.

USD/CAD has had an upside bias over the last few hours since bouncing from support at the 1.3000 level in the early European session afternoon. Trading conditions are thin given that US participants are away on holiday, but that has not prevented mild underperformance from being seen in CAD as a result of softer crude oil prices. USD/CAD currently trades just below 1.3020, up around 10 pips or 0.1% on the day.

Softness in crude oil

After a week of stunning gains in the crude oil complex that saw both WTI and Brent grades hit highs since March (or before the start of the brief Saudi/Russia oil price war that lasted into May), profit-taking is at play. WTI has slipped about 1.5% to trade around the $45.00 per barrel mark, while Brent has slipped around 1.6% to trade just under $47.80 per barrel.

Significant improvements in the outlook for demand amid positive vaccine news, combined with the news that, despite the improving outlook and higher crude oil prices, OPEC+ is still keen to extend production cuts to avoid a storage glut in Q1 2021, has given crude a significant boost and is likely to underpin the complex going forward.

However, today’s minor weakness (minor compared to recent gains, anyway) is weighing on oil export-linked currencies such as CAD and NOK.

Bank of Canada speak ignored

CAD traders seem not to know what to make of somewhat mixed commentary on monetary policy from the Governor of the Bank of Canada Tiff Macklem (or perhaps CAD traders are just not even at their desks at the moment, having written off the rest of the week to the US Thanksgiving holiday).

Macklem noted that vaccine news has been encouraging but noted that he still thinks the economy will be operating below its potential in 2023. As such, Macklem reiterated that policy must remain accommodative and Canadian can be confident that borrowing costs are going to remain very low for a very long time.

While Macklem noted that the BoC still has a lot of room to buy more government debt if needed, he reminded markets that the BoC has committed to stop buying government bonds when the recovery is well underway, which will most likely happen well before inflation hits the bank’s 2% target.

Meanwhile, Macklem said that while negative rates are in the bank’s toolkit, they would not be terribly helpful at this time. However, he did note that the BoC could still cut interest rates, which currently sit at 0.25%, seemingly implying a move lower to 0.1% (as the BoE and RBA have done in 2020) is a possibility. These comments seem to be more of just a proclamation about what the bank could do, rather than a hint about what the bank if going to do, hence the lack of reaction in CAD.

USD/CAD rangebound over the next few days?

With trade likely to be quiet again on Friday and next Monday, traders ought to be prepared for what could be an ultimately boring next couple of sessions. USD/CAD is likely to remain fairly rangebound. In fact, the pair looks to have already carved out something of a short-term range, the upper limits sitting at just below 1.3030 (Wednesday highs) and the lower bound sitting around 1.2990 (Wednesday US session and Thursday Asia session lows).

Looking at USD/CAD over a longer time-frame, the pair remains in a bearish trend channel that has been in play for roughly the last two weeks and has seen the pair drop from as high as 1.3150 to current levels around 1.3000. If USD/CAD continues to respect this trendline, as it may well do if USD continues to gradually soften as it has for most of the week so far, then USD is likely to eventually grind lower the 1.2950.

USD/CAD four-hour chart

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