USD/CAD: Bulls flirt with 1.2750 after yields propelled the biggest daily jump in two weeks

  • USD/CAD grinds higher following a notable bounce off monthly bottom.
  • US T-bond yields jumped the most in three months on covid fears, Fed rate-hike concerns.
  • Oil prices are seesawed amid virus fears, OPEC+ headlines and firmer USD.
  • US, Canada PMIs will decorate calendar, risk catalysts in focus.

USD/CAD hovers around 1.2750, after the biggest daily rise in a fortnight, during the early Tuesday morning in Asia. The Loonie pair portrayed the broad US dollar strength, backed by the surge in the US Treasury bond yields. That said, the volatile prices of Canada’s main export item, WTI crude oil, failed to contribute to the latest moves.

Fears of the South African covid variant, namely Omicron, fuelled the US bond yields at the start of 2022. The virus strain has spread faster than initially feared and pushes some of the global medical systems again on the brink of a breakdown even as policymakers stay hopeful to overcome the pandemic with optimistic studies.

“COVID worries have been front and center once again for investors since the start of the holiday season. The number of new COVID-19 cases has doubled in the last seven days to an average of 418,000 a day, mostly attributed to the highly transmissible but milder Omicron variant,” according to a Reuters tally.

Not only the virus woes but firmer hopes of faster rate hikes by the US Federal Reserve (Fed) in 2022 also propelled the US Treasury yields and the US dollar across the board. The US inflation expectations, as per the 10-Year Breakeven Inflation Rate numbers from the Federal Reserve Bank of St. Louis (FRED), jumped to a fresh high in six weeks to portray further prices pressure ahead, allowing Fed hawks to keep controls.

That said, softer prints of US Markit Manufacturing PMI for December, final reading, joined Construction Spending for November to flash lower than previous readouts and couldn’t affect the US dollar.

Amid these plays, Wall Street benchmarks closed higher and the US Treasury yields jumped to the six-week top for 30-year, 20-year, 10-year and 5-year notes.

It’s worth noting that sustained output increase by OPEC+ and fears of virus weighing on the oil demand challenged the WTI crude oil prices. Even so, the black gold ended Monday’s trading with mild gains of around $75.85.

Moving on, Canadian Markit Manufacturing PMI for December and the US ISM Manufacturing PMI for the said month, expected 57.5 and 60.2 versus 57.2 and 61.1 in that order, will entertain the USD/CAD traders. Given the recently high yields and firmer USD, backed by the COVID-19 fears, the pair is likely to remain firmer heading into Friday’s key jobs report.

Technical analysis

USD/CAD needs to overcome a two-week-old resistance line, near 1.2765 by the press time, to justify the bounce off the 100-DMA level of 1.2630. That said, bearish MACD signals and a steady RSI line keep sellers hopeful.

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