Canadian Dollar Outlook: USD/CAD Hinges on Oil & Yields

  •   USD/CAD price action attempting to push higher again amid Canadian Dollar weakness

  •   The Canadian Dollar has faced broad selling pressure alongside the plunge in oil prices

  •   USD/CAD eyeing bond yields and event risk posed by the release of monthly jobs data


  USD/CAD is pushing higher and has gained roughly 100-pips over the last three trading sessions. Canadian Dollar weakness appears broad based and likely follows the sharp move lower in crude oil prices. This is largely owed to shaky risk appetite as markets grapple with resurgent covid fears and the possibility economic growth has peaked. There is generally a strong direct relationship between crude oil and the Canadian Dollar seeing that oil exports contribute significantly to Canadian GDP.


  That said, with Canadian Dollar weakness tracking the latest plunge in oil prices, it comes as little surprise that USD/CAD has resumed its ascent. This trend might continue if concerns about the delta variant mount and downward pressure on crude oil is maintained. On the other hand, if traders can look past downside risks posed by covid, there could be potential for oil to rebound and USD/CAD to snap back lower.

  In addition to the direction of crude oil, the bond market stands out as another noteworthy barometer for gauging where USD/CAD might head next. I will be keeping close tabs on interest rate differentials between US Treasuries and Canadian Government Bonds in particular. This is considering the likelihood that yield volatility accelerates around the upcoming release of high-impact jobs data due Friday, 06 August at 12:30 GMT.

  While the Canadian jobs report stands to weigh on Loonie performance, the nonfarm payrolls report likely warrants more credence for USD/CAD outlook. This is given the potential for NFPs to sway the timeline for Fed tapering. To that end, if the yield spread between ten-year US Treasuries and Canadian Government Bonds extends higher in the wake of Fridays job data, we could see USD/CAD price action advance in similar fashion.

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