In recent sessions, sentiment in the Canadian Dollar has been relatively soft with the commodity-linked currency weighed on by the pullback in oil prices, down 4% for the week. Overnight, API crude oil inventory data showed a smaller than expected drawdown of 879k barrels (expected draw of ~3mln), which in turn failed to lift the crude complex (BNO). 

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That said, risk sentiment has stabilized from the slight hiccup earlier in the week, providing the Loonie (FXC) with some reprieve. However, risks are beginning to emerge in China with regions conducting mass testing following clusters of the Delta variant. In turn, with increased testing likely to see a pick up in virus cases, the focus will be on how the authorities will react, where a decision to reimpose strict lockdown measures likely to weigh on the high-beta currencies and thus prompt a pickup in USD/CAD.

USD/CAD (Inverted) vs Brent Crude Oil

Source: Refinitiv

Taking a look at the chart, as dips in USD/CAD find support, eyes are for a topside test of the 1.2600 handle. Although a meaningful move above 1.2600 may be hard to come by with resistance situated at 1.2618 and 1.2652 (April BoC high). On the downside, key support is situated at 1.2400 where it would take a close below to negate topside risks. My view, however, is that 1.2400 could be an area to fade dips (UDN, UUP).

USD/CAD Chart: Daily Time Frame

Source: Refinitiv