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USD/CAD Analysis: Bulls await descending channel breakout, focus on BoC decision

  • A combination of factors prompted some aggressive short-covering around USD/CAD on Tuesday.
  • Weaker risk sentiment benefitted the safe-haven USD; tumbling oil prices undermined the loonie.
  • Investors now move on the sidelines and look forward to the latest BoC monetary policy update.

The USD/CAD pair witnessed a dramatic intraday turnaround on Tuesday and rallied nearly 150 pips from the 1.2480-70 support area. The strong move up to one-week tops marked the biggest jump in nearly two months and was sponsored by a combination of factors. Renewed fears about another dangerous wave of coronavirus infections in some countries took its toll on the global risk sentiment, which was evident from the overnight sharp decline in the US equity markets. The risk-on forced investors to take refuge in traditional safe-haven currencies and assisted the US dollar to stage a modest bounce from multi-week lows. This was seen as a key factor that triggered the initial leg of the short-covering move.

The momentum got an additional boost from tumbling crude oil prices, which tend to undermine demand for the commodity-linked currency. Investors now seem worried that soaring COVID-19 cases in India will drive down fuel demand in the world’s third-biggest oil importer. This, along with a surprise build in US crude supplies, weighed heavily on oil prices. Data from the American Petroleum Institute (API) showed crude stocks rose by 436,000 barrels for the week ending April 16 and overshadowed positive signs of a fuel demand recovery in the US, UK and Europe. The US Energy Information Administration will release its inventory data for last week later this Wednesday.

The pair surged past the 1.2600 mark, albeit lacked any strong follow-through buying and was seen oscillating in a narrow trading band through the Asian session on Wednesday. Market participants turned cautious and refrained from placing any aggressive bets ahead of the latest monetary policy update by the Bank of Canada (BoC). Most analysts anticipate the BoC to cut its weekly bond-buying program by C$1 billion in response to the improving economic outlook. That said, the third wave of COVID-19 infections in Canada might force the central bank to stick to its accommodative policy stance. Hence, the key focus will be on updated economic forecasts. This will be followed by the post-meeting press conference, which might further infuse some volatility around the CAD pair.

Short-term technical outlook

From a technical perspective, the overnight strong momentum paused near the 1.2625-30 heavy supply zone. The mentioned barrier marks the top boundary of a four-month-old descending channel. A convincing breakthrough will be seen as a fresh trigger for bullish traders and pave the way for a further near-term appreciating move. Bulls might then aim to reclaim the 1.2700 mark before eventually pushing the pair further towards the next major hurdle near the 1.2740-50 region.

On the flip side, the 1.2600 mark now seems to protect the immediate downside. This is followed by support near the 1.2560-50 region. Sustained weakness below will reaffirm the trend-channel barrier and prompt some technical selling. The pair might then accelerate the slide back towards the key 1.2500 mark en-route the 1.2480-70 support zone. Some follow-through selling has the potential to drag the pair back towards the 1.2400 mark and allow bearish traders to challenge YTD lows, around the 1.2365 area.

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