A combination of factors prompted aggressive selling around USD/CAD on Tuesday.
The Canadian election outcome, rebounding crude oil prices underpinned the loonie.
The risk-on impulse weighed on the safe-haven USD and contributed to the selling bias.
The USD/CAD pair extended the previous day’s rejection slide from the 1.2900 mark and witnessed heavy follow-through selling on Tuesday, snapping three consecutive days of the winning streak. The pair remained depressed through the first half of the European session and was last seen hovering near the lower end of its daily trading range, around mid-1.2700s.
Canada’s ruling Liberal Party – led by Prime Minister Justin Trudeau – returned to power in a closely contested election on Monday, though failed to gain an absolute majority. This, along with a goodish pickup in crude oil prices, benefitted the commodity-linked loonie. Apart from this, a modest US dollar weakness exerted downward pressure on the USD/CAD pair.
The risk-on impulse – as depicted by a solid rebound in the equity markets – turned out to be a key factor that weighed on the safe-haven greenback. That said, expectations for an imminent Fed taper announcement and a fresh leg up in the US Treasury bond yields, acted as a tailwind for the USD and helped limit any further losses for the USD/CAD pair.
Investors might also refrain from placing aggressive bets, rather prefer to wait for a fresh catalyst from the outcome of a two-day FOMC meeting starting this Tuesday. The focus will be on clues about the likely timing of the Fed’s tapering plan, which will play a key role in influencing the USD and provide a fresh directional impetus to the USD/CAD pair.
Hence, any subsequent slide might still be seen as a buying opportunity and remain limited near the 1.2700 round-figure mark ahead of the key central bank event risk. The mentioned handle represents a one-week-old trading range resistance breakpoint and should act as a pivotal point for short-term traders amid a relatively thin economic docket on Tuesday.
Technical levels to watch