USD/CAD drops to 1.2900 neighbourhood amid rising oil prices, softer USD

• A combination of factors dragged USD/CAD lower for the second straight day on Tuesday.
• Rising oil prices underpinned the loonie and exerted pressure amid modest USD weakness.
• Hawkish Fed expectations should limit deeper USD losses and extend support to the major.

The USD/CAD pair extended its retracement slide from the YTD peak, around the 1.3075-1.3080 area set on Friday and witnessed some follow-through selling for the second successive day on Tuesday. The downward trajectory dragged spot prices to a three-day low, closer to the 1.2900 mark during the early European session and was sponsored by a combination of factors.

Crude oil prices gained some positive traction and built on the overnight bounce from the vicinity of a one-month low amid worries about tightening global supplies, which benefitted the commodity-linked loonie. On the other hand, a generally positive tone around the equity markets undermined the safe-haven US dollar and exerted downward pressure on the USD/CAD pair.

That said, growing market concerns about slowing global economic growth and fuel demand could act as a headwind for crude oil prices. Furthermore, expectations that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation could lend support to the USD. This should help limit deeper losses for the USD/CAD pair, warranting caution for bears.

The markets seem convinced that the US central bank would stick to its aggressive policy tightening path and have been pricing in another 75 bps rate hike at the next FOMC meeting in July. The bets were reinforced by a fresh leg up in the US Treasury bond yields, which supports prospects for the emergence of USD dip-buying and should lend support to the USD/CAD pair.

Hence, it would be prudent to wait for strong follow-through selling before confirming a near-term top for the USD/CAD pair and positioning for any meaningful corrective slide. Traders now look forward to the release of Canadian monthly Retail Sales figures, which, along with Existing Home Sales data from the US, might provide some impetus to the USD/CAD pair.