USD/CAD hits annual highs in 1.2960s as crude oil tanks amid Omicron concerns

• USD/CAD hit fresh annual highs on Monday, spiking above the August high at 1.2949 and reaching as high as 1.2964.
• The pair has since dropped back to the 1.2940s area, but still trades with gains of about 0.4% on the day.
• CAD is underperforming amid steep downside in crude oil amid a broadly risk-off market feel.

USD/CAD hit fresh annual highs on Monday, spiking above the 20 August high at 1.2949 and reaching as far as 1.2964, before backing off to the 1.2940 area. That means the pair is currently trading higher on the day by about 0.4%, reflective of a sharp deterioration in the market’s broader appetite for risk and substantial losses in crude oil markets. Concerns about the rapid spread of Omicron in Europe and moves being taken by nations there to tighten restrictions have triggered fears the US may be only a few weeks behind. Traders are also disappointed by fading US fiscal stimulus hopes are moderate Senate Democrat Joe Manchin nuked the Biden administration's flagship $1.75T Build Back Better spending package by announcing he would not support it.

These factors have combined to send the S&P 500 nearly 2.0% lower on the day and to send WTI more than $3.0 lower to the low-$67.00s. That oil’s worst one-day performance since the 26 November $10.00 drop on the initial Omicron news. In that regard, it is perhaps surprising that USD/CAD’s gains are even more. But traders will note that the pair has come a long way in recent sessions (the pair is up over 2.5% since the December lows near 1.2600) and is currently probing a key area of resistance.

Aside from the potential for them to be buffetted by broader shifts in risk appetite, FX markets were supposed to have a calm week this week, and yet still may. Given the proximity to Christmas and year-end holidays, FX volumes will be thinner than usual with many market players away. The only notable US economic event in November Core PCE on Thursday. It's already expected to be high and the Fed is known to be concerned about inflation, so isnt likely to move markets much unless there is a big miss/beat on expectations. In terms of Canadian events, the most notable are October Retail Sales on Tuesday followed by October GDP numbers on Thursday. Otherwise, the pair will follow broader risk appetite, which will be driven by Omicron news.