USDCAD has been under pressure since mid-December as oil prices have rebounded strongly, gaining up to 16% since the low of 20 December, as health concerns have eased.

Several serious studies indicated last week that the Omicron variant was less dangerous than other strains of COVID-19, and hospitalization and death patterns seem to confirm this diagnosis. Despite the surge in infections to record levels, the hospitalization and death curves remain moderate.

Investors are therefore reassured and naturally anticipate the absence of strict health restrictions in Europe or the US, which benefits oil prices and allows the Canadian dollar to outperform its US counterpart.

Obviously, if this diagnosis turns out to be wrong and governments drastically tighten restrictions, it would be bad for risky assets, oil and the Canadian dollar, and positive for safe haven assets like the dollar.

From a technical perspective, the USDCAD retraced some of its rise last week, but has since formed a descending triangle from support at 1.2764, which is a sign of short-term uncertainty.

Given that the movement prior to the triangle was bearish, it is theoretically more likely that the exchange rate will break out from the bottom of this pattern.

A bottom exit would be a bearish signal for a pullback to the early December low at around 1.26. Conversely, an upward exit would pave the way for a resumption of the underlying uptrend. A return to the recent high at 1.25 would be expected in the short term.

Pending the monthly US jobs report on Friday 7 January, the health situation is likely to remain the main catalyst for the markets. A tightening of health restrictions in Europe and/or the US would be bad for oil, the Canadian dollar and positive for the greenback.

Analyst by: Mr.Thibault Moirez, Independent Analyst