USD/CAD rangebound either side of 1.2500 level with Canada/China relations in focus

• USD/CAD has been swinging either side of the 1.2500 level, with the loonie is an underperformer in the G10.
• Underperformance is being attributed to concerns over Chinese/Canadian diplomatic relations.

USD/CAD has been swinging either side of the 1.2500 level on Monday and currently sits around the 1.2510 mark, up a modest 10 pips or 0.1% on the day. That means that the loonie is one of the worst-performing currencies on the day, alongside the US dollar; most other G10 majors are performing much better than the buck. 1.2550 appears to be the area the pair is struggling to get above and should be noted as resistance.

Driving the day

The loonie is one of the worst-performing currencies in the G10 on Monday. The reason why is not abundantly clear, after all, risk assets are generally performing well (global equities and crude oil markets are performing well at the very least) supported by a drop in US government bond yields, with the 10-year yield now comfortably back below the 1.70% level – This would typically have a positive impact on the loonie.

Some market commentators are suggesting nerves around Canada/Chinese diplomatic relations could be a factor. In terms of the latest on that front, Canada is joining forces with the US, UK and EU to impose an array of sanctions on China over its treatment of the Uyghur Muslims in Xinjian; specifically, Canada will impose sanctions on four Chinese officials and one entity for human rights violations. Canada Foreign Ministry has also publicly said that the country is deeply troubled by the lack of transparency in a Chinese hearing of two Canadian men being held there.

Looking USD/CAD will be volatile as a result of key incoming risk events on both sides of the US/Canadian border this week; in the US, a heavy slate of Fed speak, the release of the preliminary US Markit PMI survey for this month on Wednesday and the release of Core PCE data on Friday will keep the dollar traders busy. Meanwhile, loonie traders will need to keep an eye on comments from BoC Deputy Governor Toni Gravelle on Tuesday.