USD/CAD traders turn to oil prices for direction

• The USD/CAD bears are banking on higher oil prices. 
• Russia invasion risks underpin the US dollar while traders anticipate imminent Fed hike. 

USD/CAD is steady in Asia as traders sit on their hands in anticipation of the possibility of heightened tensions surrounding prospects of a Russian invasion of Ukraine. The price of oil, for which CAD trades as a proxy has surged in line with Russia risk premium. Consequently, the loonie has been a difficult opponent for the US dollar bulls with USD/CAD rallies faded below prior daily highs. 

All eyes on Russia's next move

At the time of writing, USD/CAD is trading at 1.2734 in a 10 pip range while geopolitical tensions, which could still drive oil prices into triple digits, are being monitored very closely. There was a close call of confirmation that Russia intended to invade Ukraine but only by misinterpretation of Ukraine's president's Facebook message to his country by various media sources. 

Ukraine President Volodymyr Zelenskiy urged Ukrainians to fly the country's flags from buildings and sing the national anthem in unison on Feb. 16, a date some Western media have cited as the possible start of a Russian invasion. However, the comments were interpreted as if the president of Ukraine had been officially informed that Wednesday would be the day of the attack.

Markets reacted in kind and sold-off, but not as they should if an actual invasion was really going to take place, There was an air of doubt in the market's air and the moves were contained to what looked like more of a false start. Shortly after the initial knee-jerk moves, a Ukrainian official said Zelenskiy was not predicting an attack on the 16th but instead was responding with scepticism to foreign media reports. 

Nonetheless, it was enough of a scare for energy markets that sent the price of oil to the highest levels yet in the current bull cycle with WTI printing $95.79bbls. USD/CAD subsequently took a trip to print a session low of 1.2719.  

However, the US dollar is a double-edged sword and benefits from both risk-off and the prospects of a faster pace of Federal Reserve tightening. The US dollar index reached a two-week high on Monday on not only escalations of the prospects of war, but also due to comments from St. Louis Federal Reserve President James Bullard who reiterated calls for faster Fed interest rate hikes. The dollar index (DXY) reached 96.435, its highest since Feb. 1.