USD/CAD slides further below mid-1.3800s on rebounding Oil prices and a weaker USD

• A combination of factors drags USD/CAD away from the YTD peak touched on Wednesday.
• A modest uptick in Oil prices underpins the Loonie and exerts pressure amid a weaker USD.
• A positive risk tone is seen as another factor denting demand for the safe-haven Greenback.

The USD/CAD pair remains under some selling pressure for the second successive day on Thursday and extends the overnight rejection slide from the 1.3900 mark, or its highest level since October 2022. The downtick drags spot prices to the 1.3825 area during the Asian session and is sponsored by a combination of factors.

Crude Oil prices gain some positive traction and for now, seem to have snapped a three-day losing streak to over a two-month low touched on Wednesday, which is seen underpinning the commodity-linked Loonie. The US Dollar (USD), on the other hand, continues to be weighed down by expectations that the Federal Reserve (Fed) is nearing the end of its rate-hiking cycle and contributes to the offered tone surrounding the USD/CAD pair.

Fed Chair Jerome Powell, addressing the press at the end of a two-day policy meeting, noted that the recent market-driven surge in borrowing costs could have its impact on economic activity and that financial conditions may be tight enough already to control inflation. The markets were quick to price in the possibility that the Fed will start cutting rates in June 2024, which is reinforced by the ongoing slide in the US Treasury bond yields.

The yield on the rate-sensitive two-year US government bond falls to its lowest level since September 8 and the benchmark 10-year Treasury yield moves away from the 5% threshold. This, along with a generally positive tone around the equity markets, turns out to be another factor denting the Greenback's relative safe-haven status. The Fed, meanwhile, acknowledged the US economic resilience and left the door open for additional rate hikes.

In contrast, the Bank of Canada (BoC) Governor Tiff Macklem indicated last week that interest rates may have peaked. This might hold back traders from placing aggressive bearish bets around the USD/CAD pair and warrants some caution before confirming that spot prices have topped out in the near term. Market participants now look to the US macro data – Weekly Initial Jobless Claims and Factory Orders – for short-term trading impetus.

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