The turnaround and further retracement in oil prices yesterday helped to flip the loonie on its head, as USD/CAD went from being lower in European trading to pushing back towards 1.2500 in North American trading.
The pair closed below the figure level at the end of the day but buyers are not letting up as we see price touch 1.2530 today - the highest since 22 April.
From a technical perspective, this is a suggestive breakout with little in the way of a push towards the April highs around 1.2630-54 next. The 200-day moving average (blue line) will also be a key target for buyers, seen currently @ 1.2650.
The loonie has had a solid run so far this year and one can argue that it is overdue for a pullback. That said, I retain the conviction that against the dollar, it will be tougher for the loonie to navigate further gains with the Fed also looking to taper.
But the key technical levels above will be a good litmus test as for whether this latest upturn is merely a retracement or a break in the downtrend for the pair since last year.
On the one hand, oil prices are likely to still track higher in the medium-term with the BOC also among the leaders in tightening policy. That's a decent argument to be bullish on the Canadian dollar structurally. On the other hand, it is the Fed they're up against.