USD/CAD eyes test of 200DMA at 1.2618 despite strong Canada jobs report, as buck strength continues

• USD/CAD is trading above 1.2600 and eyeing a test of its 200DMA at 1.2618, despite strong Canadian jobs data.
• Hawkish Fed vibes have driven the rally in the pair these last three days.
• Next week will be a busy one with US CPI, PPI and Retail Sales plus the BoC setting interest rates.

USD/CAD looks intent on testing its 200-Day Moving Average at 1.2618, with the latest decent Canadian employment figures not turning the tide on recent Canadian dollar depreciation versus its US counterpart. At current levels just above 1.2600, the pair is trading with on-the-day gains of about 0.15%, having earlier found support on a dip back towards the 1.2575 area. That means the pair is on course to post a third successive session in the green and, at levels above 1.2600, is trading at its highest since 23 March.

The main driver of recent strength has come from the US dollar side of the exchange rate. Hawkish commentary this week, most notably from Fed Vice Chair Lael Brainard and St Louis Fed President James Bullard, plus a hawkish sounding Fed minutes release, has ignited a rally in US yields as traders up their Fed tightening bets. This, combined with demand for safe-haven assets with global equities set to end the week lower, has supported the US dollar against most of its G10 peers.

The loonie has also been hit by an ongoing downtrend in global oil prices, the main driver of which has been recent oil reserve release announcements from IEA nations. Crude oil is one of Canada’s largest exports. Notably, Biden administration officials said earlier in the week that they were looking for ways to boost imports of oil from Canada. This could help support the loonie going forward, even if crude oil does continue declining.

Looking ahead, next week will be a busy one for USD/CAD traders. Key tier one US data, including Consumer and Producer Price Inflation plus Retail Sales data will be released. Meanwhile, the BoC will be deciding on interest rates, with the market’s base case assumption that they will raise interest rates by 50bps. The recently released jobs report should further solidify expectations for a large hike. USD/CAD choppiness is likely to continue and a key question will be whether traders take the recent rally back towards the 200DMA as an opportunity to sell.