The USD/CAD pair turned flat heading into the North American session and was last seen trading around the 1.2470-75 region, nearly unchanged for the day.
The pair found some support near the lower boundary of a three-week-old descending trend channel and bounce around 25-30 pips from over two-month lows amid renewed US dollar buying. Expectations that the Fed will begin rolling back its pandemic-era stimulus as soon as November continued acting as a tailwind for the greenback.
The USD further drew support from rising bets for an interest rate hike in 2022, bolstered by worries that the recent surge in crude oil/energy prices will stoke inflation. The combination of factors pushed the yield on the benchmark 10-year US government bond to four-month tops, beyond the 1.60% threshold on Friday.
Meanwhile, fears of a return of stagflation – high inflation and low growth – tempered investors' appetite for perceived riskier assets. This was evident from a softer tone around the equity markets, which was seen as another factor that benefitted the safe-haven greenback and extended some support to the USD/CAD pair.
The upside, however, remains capped amid elevated crude oil prices, which tend to underpin the commodity-linked loonie. This, along with relatively thin liquidity conditions on the back of a bank holiday in the US and Canada, might keep a lid on any meaningful recovery for the USD/CAD pair, at least for the time being.
This makes it prudent to wait for a strong follow-through buying before confirming that the USD/CAD pair has bottomed out in the near term and positioning for any further gains. Hence, any subsequent move up is more likely to face stiff resistance near the key 1.2500 psychological mark, followed by the very important 200-day SMA.
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