USD/CAD to display volatility contraction after a sell-off, oil hovers around $74.00

• USD/CAD is expected to remain rangebound till the release of a potential trigger ahead.
• The catalyst that has triggered volatility for the USD index is the weak Average Hourly Earnings data.
• Oil prices remain sideways amid ambiguity over the Covid situation in the Chinese economy.

The USD/CAD pair is displaying a sideways profile below 1.3450 in the early Tokyo session. A rangebound action is expected from the Loonie asset as sheer volatility is generally followed by volatility contraction.

A significant improvement in the risk appetite of the market participants after a decline in the United States Average Hourly Earnings strengthened risk-sensitive assets such as S&P500. The 500-stock US basket snapped its 10-day subdued performance and jumped heavily. While the US Dollar Index (DXY) witnessed carnage amid a decline in safe-haven’s appeal. The return on 10-year US Treasury bonds witnessed a marginal sell-off and dropped to 3.56%.

An upbeat US Nonfarm Payrolls (NFP) was already expected by the market participants after a solid addition of payrolls in December reported by the US Automatic Data Processing (ADP) Employment Change. The catalyst that triggered volatility in the USD Index was the decline in Average Hourly Earnings to 4.6% vs. the expectations of 5.0%. This might support a further downward shift in the extent of an interest rate hike by the Federal Reserve (Fed).

Chicago Fed President Evans quoted in Wall Street Journal (WSJ), “It was possible the economic data would support raising the policy rate by 25 basis points at the Fed's next gathering” as reported by Reuters.

On the Canadian Dollar front, Net Change in Employment released stronger-than-anticipated at 104K than the consensus of 8K and the prior release of 10.4K. The Unemployment Rate dropped to 5.0% along with Average Hourly Wages (Dec) which was trimmed to 5.2%. This is going to create hurdles for the Bank of Canada (BoC) ahead.

Meanwhile, oil prices are struggling to find direction from the $73.00-75.00 range. Investors are in a fix on whether to support black gold considering an improvement in long-term economic projections of the Chinese economy due to reopening or to punish for short-term pain in oil demand led by a spike in Covid-19 infections.