USD/CAD stablising following a round trip in the safe-haven flows

• USD/CAD is back in the hands of the bulls in volatile trade to start the week.
• COVID concerns have supported the greenback and weighed on the higher beta forex space. 

At the time of writing, USD/CAD is trading at 1.2834 and is higher by some 0.4%. 

The pair travelled from a low of 1.2784 to a high of 1.2957 at the start of the week as the greenback picked up a safe-haven bid on elevated fears about a fast-spreading new coronavirus strain that was discovered in the UK, prompting investors to seek safety in the greenback.

However, the DXY is on the verge of making a round trip within the start of the week's range, albeit still +0.12% vs the close on Friday. 

In terms of the pandemic, it is widely hoped that the end of 2021 will look starkly different from the start and markets, after a knee-jerk panic reaction, have tended to look through the immediate risks throughout the pandemic. 

As explained in this week's S&P 500 Index Weekly Forecast: Will investors sell the fact and adhere to bearish candlesticks? ''there will be questions over the new variant of the virus and whether a vaccine can indeed save the day.''

However, Jesse Bloom, an evolutionary biologist at the Fred Hutchinson Cancer Research Center in Seattle argued, “No one should worry that there is going to be a single catastrophic mutation that suddenly renders all immunity and antibodies useless.” 

With all that being said, financial markets are taking heed of the fact that millions of people mostly in Europe and in the US are preparing for tougher restrictions to cope with the next wave of covid-19.  

High beta forex takes a knock

As telegraphed in the above forecast, the US stock market took a plunge on Monday following a bearish technical picture on the S&P 500 as follows:

Consequently, the high betas, such as the commodity currencies and including the Candian dollar, all took a knock. 

Looking forward

As explained, due to the good news on vaccines and ongoing stimulus measures, financial markets have appeared to develop a habit of looking through bad news and seeing a light at the end of the tunnel. 

However, there are clear signs of fraying sentiment to start the week. 

A couple of quarters of poor economic news pertaining to harshening and prolonged restrictions amid renewed uncertainty could well hamstring optimism for the meanwhile and put a floor under the greenback. 

Moreover, from a positioning standpoint, net short USD positions have leapt to their highest levels since March 2011. Consequently, there is plenty of upside for the greenback to cover. 

Meanwhile, CAD net short positions dropped to their lowest levels since October. Another drop in oil prices could undermine the CAD in the next release.

USD/CAD technical analysis

The pair shot up in a corrective measure of the weekly overextended M-formation as follows:

Monthly chart:

Weekly chart:

After an M-formation, you expect a measured pull back to at least the 38.2% Fibonacci retracement and that is exactly what we got. 

At this juncture, there are prospects of a head and shoulders formation on the hourly chart: