USD/CAD moves back above 1.2700 as oil prices decline, BoC takes the back seat

• USD/CAD moved back above 1.2700 on Thursday as oil prices came under selling pressure.
• BoC’s Gravelle spoke and largely stuck to the bank’s script after it held policy settings/guidance as expected on Wednesday.

USD/CAD has been on the front foot on Thursday, gaining about 0.4% to move back to the north of the 1.2700 level. That marks a 0.8% turnaround from Wednesday’s lows close to 1.2600, though the pair still trades lower on the week by about 1.0%, having opened Monday trade to the north of the 1.2800 level.

Thursday’s upside means USD/CAD is back above its 21-day moving average and the pair is now probing an area of resistance around the 1.2810 mark (the December 1 low). The next level of upside resistance is around 1.2750. Beyond that, there isnt much by way of technical barriers to stop the pair from retracing all of this week’s losses and returning to last Friday’s highs at 1.2850.

Driving the day

The main driver of upside in USD/CAD on Thursday has been a downturn in crude oil prices. WTI has been slipping in recent trade and is now down more than $2.0 on the day and under the $71.00 level. Risk appetite has deteriorated broadly on Thursday, not especially due to any one headline or piece of news, but likely more due to profit-taking ahead of risk events (like US inflation on Friday). This is likely the main driver of crude oil’s downside, though concerns about Covid-19 restriction reimposition after UK PM Boris Johnson announced new restrictions for England on Wednesday may be contributing to the caution.

Elsewhere there has been plenty of focus on the Bank of Canada over the last two days. The bank on Wednesday held interest rates at 0.25% as expected and maintained guidance for a first rate hike as soon as April 2022. There was something for both the hawks and doves to clutch at in the statement, which noted the risk presented by Omicron, whilst also noting the growing upside inflation risks.

Deputy Governor Toni Gravelle was on the wires on Thursday but largely stuck to the bank’s script in terms of economic commentary and thus didn’t move the loonie. Indeed, the latest BoC meeting seems not to have really had any noticeable impact on the loonie at all. Things should spice up next year from a BoC/FX reaction point of view when the bank has more certainty about the impact of the Omicron variant and potential rate hikes are closer.