The USD/CAD pair struggles for a firm direction for the second successive day and seesaws between tepid gains/minor losses through Monday’s first half of the European session. Spot prices, however, manage to hold comfortably above the 1.3700 mark and draw support from a combination of factors.
Crude Oil prices sink to a fresh 15-month low amid worries that a full-blown global banking crisis will cause a recession and hurt fuel demand. This, in turn, is seen weighing on the commodity-linked Loonie and acting as a tailwind for the USD/CAD pair amid a modest US Dollar strength, bolstered by the flight to safety amid the prevalent risk-off environment.
Despite the recent emergency liquidity measures and multi-billion-dollar lifelines for troubled US and European banks, concerns about the contagion risk showed little signs of subsiding. This and worries about a deeper global economic downturn tempers investors’ appetite for riskier assets and benefits traditional safe-haven assets, including the Greenback.
That said, a further steep decline in the US Treasury bond yields is holding back the USD bulls from placing aggressive bets and capping the upside for the USD/CAD pair, at least for now. The markets now seem convinced that the Fed will adopt a less aggressive stance and have been pricing in a 25 bps lift-off at its March policy meeting, starting this Tuesday.
The US central bank is also expected to start cutting interest rates during the second half of the year, which led to the recent sharp downfall in the US Treasury bond yields. Last week, the rate-sensitive 2-year US government bond recorded its biggest three-day slump since Black Monday in October 1987 and warranted some caution for the USD/CAD bulls.
Traders also seem reluctant and prefer to wait on the sidelines ahead of the outcome of the highly-anticipated FOMC meeting, due to be announced on Wednesday. Heading into the critical central bank event risk, traders will take cues from releasing the latest Canadian consumer inflation figures, scheduled for release on Tuesday, for short-term trading impetus.