USD/CAD extends losses since slipping back below 1.2800

• USD/CAD losses have accelerated in recent trade as USD continues to weaken.
• Bears will be on the lookout for a test of annual lows just under the psychological 1.2700 level.

USD/CAD has been on the back foot thus far on Wednesday, the pair dropping from above the 1.2800 level in Asia Pacific trade to the 1.2750s more recently. The move is being driven by a weakening of the US dollar as opposed to strength in the loonie; CAD currently sits close to the middle of the G10 FX performance table, up around 0.5% on the day versus the buck. USD/CAD is nursing losses around 60 pips, with the bears eyeing a move back towards annual lows just under 1.2700, potentially before the year is out. 

Fundamental considerations for USD/CAD…

There has not been much by way of important Canadian fundamental developments (things have been all quiet on the Canadian economic data, BoC and political fronts). USD/CAD is much more focused on events south of the border; if the US Senate can pass an additional $1400 in stimulus cheques, increasing the total stimulus cheque to $2000, this bodes will for the US economy and for the Canadian export sector which is highly exposed to the US.

It looks as though this bill, which has already passed in the House, will be stuck in the Senate for at least a few more days before it is voted on; Republican Senate Majority Leader Mitch McConnell is most likely attempting to delay the vote on the bill until after the 5 January Georgia run-off elections. This tactic could well backfire for the Republicans if Americans desperate for economic aid from the government are put off by this and hand the Democrats victory; a Democrat-controlled Congress would likely pump trillions in additional stimulus in 2021.

The themes of stimulus and the Senate elections will continue to be relevant for USD/CAD into 2021, as will crude oil market dynamics; despite Europe and the US increasingly locking down again to curb the spread of the virus (hurting fuel demand), crude oil markets remain close to recent highs, supported by vaccine hopes. However, the fact that OPEC+ is still on course to ease supply cuts from January despite falling near-term demand might be concerning. Any crude weakness could slow the pace of USD/CAD depreciation.