USD/CAD dips under 1.2750, hits more than two-week lows on eve of New Year’s Eve

• USD/CAD hit more than two-week lows under 1.2750 on Thursday as risk appetite and crude oil prices remains buoyant.
• Trading conditions will be subdued on Friday, which is New Year’s Eve, but will pick up next week.

USD/CAD broke below key support in the 1.2760s to hit its lowest level in over two on Thursday just under the 1.2750 mark. That translates into on the day losses of around 0.3%. Trade has been tentative this week with FX markets largely in holiday mode with many participants in Canada, the US, Europe and elsewhere away for Christmas and New Year’s celebrations. But that hasn’t stopped the loonie from benefitting from a recent drastic improvement in the market's appetite for risk, which has helped push US equity benchmarks to record levels and pushed oil prices to monthly highs around their pre-Omicron levels.

Evidence, in the form of independent studies and real-time data, increasingly points to the Omicron Covid-19 variant being substantially milder than prior strains and the US last week also approved two highly effective at-home Covid-19 treatment pills for at-risk patients. Meanwhile, nations in Europe (the UK, France and Spain) are holding off on locking down to curb the rapid transmission of Omicron with health care systems currently a long way off being at risk of being overwhelmed. This, as well as positive seasonality that typically supports US equities in the final days of the year, has been a key driver the recent upturn in risk appetite. To recap, WTI fell as low as $66.00 last Monday, coinciding with USD/CAD spiking above 1.2950, but has since rallied to the $76.00s, coinciding with USD/CAD dropping over 1.5% to current levels under 1.2750.

Recent selling pressure in USD/CAD has seen the pair relinquish the 21-day moving average in the 1.2800 area which had been acting as a magnet to the price action for most of the last week. Trading conditions will be subdued on Friday given most European markets will be shut or closing shop early for New Year’s Eve and though US and Canadian markets will be open as usual, many market participants will in North America will likely also be exiting early. But in the new year, so long as risk appetite remains healthy and as long as markets continue to bet that the BoC will kick off its rate hike cycle by the end of Q1 2022, USD/CAD might be headed back towards December lows around 1.2600.