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USD/CAD attracted buyers for the second consecutive day on Monday and held on to modest intraday gains around 1.3925 during the first half of the European session. Spot prices found support from a variety of factors and remained near the highest levels since October 2022, backtested last week.
Crude prices struggled to gain any meaningful traction as China’s fiscal stimulus disappointed and Chinese inflation data came in worse than expected, undermining hopes of a recovery in fuel demand in the world’s top importer. Meanwhile, mixed Canadian employment data on Friday did little to dampen market expectations for more aggressive easing from the Bank of Canada (BOC). This, in turn, was bullish for the commodity-linked Canadian dollar, which coupled with bullish buying of the US dollar (USD), pushed the USD/CAD pair higher at the start of the new week.
The U.S. dollar index (DXY), which tracks the U.S. dollar against a basket of currencies, recovered and is near a four-month high hit last week on optimism about U.S. President-elect Donald Trump’s expansionary policies. In addition, Trump has promised to impose a 10% tariff on imports from all countries, which is expected to fuel inflation and limit the Federal Reserve (Fed) from easing monetary policy more aggressively. This remains supportive of rising U.S. Treasury yields, which, coupled with cautious market sentiment, continues to be positive for the safe-haven dollar.
However, dollar bulls may take a breather ahead of the release of U.S. consumer inflation data and speeches from several influential FOMC members, including Federal Reserve Chairman Jerome Powell, in the week ahead. Nonetheless, the fundamental backdrop suggests that the path of least resistance for the USD and USD/CAD pairs remains to the upside. Therefore, with the U.S. and Canada taking part of the holiday season, any corrective pullback may still be viewed as a buying opportunity and remain limited.
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