USD/CAD inter-markets: between yields and oil

USD/CAD is retreating today following two consecutive sessions with gains, coming down from yesterday’s tops above the 1.3200 handle, coincident with the bottom of the rising channel off May’16 lows.

Declining yields in US money markets are not accompanying the recent up move in the buck, although the divergence in policies between the Federal Reserve and the Bank of Canada is expected to play in favour of USD in the next months.

Additionally, crude oil dynamics - albeit momentarily relegated to a secondary role as driver – have lost upside momentum, dragging the barrel of West Texas Intermediate back to sub-$52.00 levels following a massive build in US supplies, as reported by the API late on Tuesday.

Furthermore, scepticism remains high over the compliance of the deal between OPEC and non-OPEC countries to cut the oil output, while the rising activity in US drillers could prompt US shale producers to increase their production, all weighing on sentiment.

If we add the cautious stance from the Bank of Canada, which stays vigilant on the US fundamentals particularly after Trump took office, the prospects for CAD remain quite fragile, allowing spot to resume the upside on a more sustainable basis.