USD/CAD drives into mid-1.2800s despite surging commodity prices, strong Canadian trade figures

• USD/CAD continues to push higher, recently topping 1.2850 despite surging commodity prices and strong Canadian trade data.
• Some have questioned whether recent CAD underperformance versus the likes of AUD and NZD can continue for much longer.

Surging energy and precious metal prices with the US expected to imminently announce a ban on all Russian energy imports, plus the largest monthly Canadian trade surplus since 2008 has done little to protect the loonie from the US dollar’s advances. USD/CAD punched to the north of the 1.2850 mark earlier on Tuesday, though has since dropped back into the 1.2830s, but is still eyeing a test of last month’s highs in the 1.2875 area. The pair is up a further 0.1% on Tuesday having found decent support at 1.2800 earlier in the day, taking its gains since last Thursday’s sub-1.2600 lows to nearly 2.0%.  

Recent underperformance of the loonie against the US dollar seems to reflect the general worsening of risk appetite observed since Russia’s invasion of Ukraine. CAD typically has a positive correlation to risk assets such as US equities, falling when they come under pressure. But commodity price upside is typically associated with a stronger loonie given Canada’s status as a major energy and raw materials exporter. CAD’s 1.3% depreciation in value versus the buck since the start of the month thus seems somewhat at odds with AUD and NZD’s respective 1.0% and 0.5% appreciation.

Some traders suspect that CAD’s underperformance versus its fellow non-US dollar G10 counterparts this month won’t last too much longer. If FX markets revert back to trading more as a function of commodity price movements rather than risk-off (which favours safe-havens like USD and JPY), then the prospect for a USD/CAD decline back towards monthly lows is there. In the meantime, traders will also need to focus on a number of key US and Canadian data releases this week, including US CPI on Thursday and Canada jobs on Friday. Neither should shift the BoC or Fed from their current guidance for an upcoming series of rate hikes, though could spur some volatility.