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  • USD/CAD has been on the back foot over the past few hours, primarily as a function of a gradually weakening USD.
  • The pair has moved back below the 1.2800 level and is testing the mid-December triple top at 1.2790.

USD/CAD has seen an extension of downside in recent trade which has seen the pair dip below the 1.2800 level, Tuesday FX open levels of closer to 1.2850. The move is primarily being driven by a weakening US dollar as opposed to loonie strength, amid choppy market conditions. At present, USD/CAD trades with losses of around 0.3% or just over 40 pips.

Loonie conforms to US dollar dynamics

USD/CAD, as is the case with other risk-sensitive USD majors such as AUD/USD, NZD/USD and more, is trading predominantly as a function of global risk appetite and US dollar dynamics. Indeed, no notable economic, political or otherwise events are on the calendar this week. Thus, the focus is on the passage of further stimulus south of the border (the question now being whether the Senate will pass increasing stimulus cheques to $2000 after the House gave the increase the nod on Monday).

Arguably, the more the US government spends, the better for Canada, whose export sectors is disproportionately exposed to the US market versus its other G10 peers. Thus CAD could see some outperformance.

Eyes are also on developments in the crude oil markets, which are juggling the competing themes of incoming US fiscal stimulus and ongoing mass vaccinations against rising Covid-19 cases in Europe and elsewhere (which seems likely to trigger tighter lockdowns in Q1 2021), reducing near-term crude oil demand, as well as OPEC+’s planned gradual easing of output cuts from the start of January.

USD/CAD testing mid-December triple top

USD/CAD has reverted back to test a triple top that was in play in mid-December, linking the 11, 14 and 16 December highs at 1.2790. A break below this level is likely to open the door to a gradual move back towards 1.2700 and the annual lows set just below it just under 1.2690.

USD/CAD four hour chart