The USD/CAD pair managed to attract dip-buyers following a significant retracement from its highest level since March 2020. Despite its struggle to capitalize on the move beyond the mid-1.4300s, the pair trades with a positive bias for the second successive day. This development arises as the US Dollar (USD) finds renewed strength amid a modest recovery in US Treasury bond yields. However, the pair's upside remains constrained by factors such as rising expectations of a Bank of Japan (BoJ) rate hike and ongoing US-China trade tensions under Trump 2.0.
A recent decline in oil prices has undermined the Canadian Dollar (CAD), lending support to the USD/CAD pair. As a commodity-linked currency, the Loonie is particularly sensitive to fluctuations in oil prices, which have seen a downturn in recent days. Additionally, market participants anticipate further rate cuts by the Bank of Canada (BoC), putting additional pressure on the CAD. The Canadian economy's annual inflation rate fell to 1.8% in December, bolstering expectations of continued rate cuts by the BoC, potentially extending into 2025.
Despite the positive bias towards USD/CAD, traders exercise caution due to the recent range-bound price action observed over the past month. The lack of significant economic data releases from either the US or Canada on Wednesday leaves spot prices at the mercy of broader USD movements. Investors also remain cautious as they await upcoming policy decisions from both the BoC and the Federal Reserve next week, which could influence future market directions.
The USD/CAD pair's downside is cushioned by China's liquidity injections ahead of the Lunar New Year, while its upside is curtailed by mounting fears of a US-China trade war resurgence. The speculation surrounding potential BoJ rate hikes this week further limits any substantial upward movement for the pair. Meanwhile, the USD gains traction after moving away from a two-week low retested on Tuesday.
The Canadian Dollar faces additional pressure from bets on more BoC rate cuts. This sentiment reflects growing concerns over Canada's economic outlook, prompting market participants to position themselves accordingly. In contrast, the USD benefits from growing demand amid a modest recovery in US Treasury bond yields, lending support to its recent positive performance.