USD/CAD advances towards 1.2600 on weak oil prices

• USD/CAD is inching towards the previous weeks’ high at 1.2620 as bears attack the oil market.
• Easing supply concerns and falling demand in China have brought a sell-off in the oil prices.
• An uncertain motion is expected from the DXY ahead of the US CPI.

During the early Asian session, the USD/CAD pair exploded out of its consolidation, which had been trading in a tight range of 1.2562-1.2578 amid declining oil prices and a surge in the US dollar index (DXY), which had opened with a negative gap below 100.00 earlier in the day.

Oil prices are extending their losses from the previous week as supply fears subside and demand declines as a result of stringent limitations on Covid-19 imports into China, according to Bloomberg. The International Energy Agency (IEA) will release 60 million barrels over the next six months from its strategic stocks, resulting in a two million barrel increase in the amount of oil that will be released. Earlier, US Vice President Joe Biden announced an extra one million barrels of oil release from the country's Strategic Petroleum Reserve for a six-month period (SPR). Reduced supply worries, along with an increase in oil production by the nations, may help to bring oil prices back down. Nevertheless, it would be fascinating to see to what extent the new oil production can make up for the shortage in Russian oil that has resulted from the harsh sanctions imposed by the Western peers.

On the demand side, the Chinese government has put Shanghai, the country's most populous metropolis, under its 'zero tolerance' category in order to keep the Covid-19 from escalating further. China is the world's largest importer of oil, and a decline in demand from the Asian behemoth would have a significant impact on oil prices.

Supply worries are subsiding, and demand is declining, which will support the value of the dollar relative to the loonie in the future. Because of the decline in oil prices, Canada, which is the world's top oil supplier to the United States, will see a reduction in inflows.

Following the publication of the US inflation data on Tuesday, the DXY is expected to see violent swings in the near future. While the Bank of Canada's (BOC) interest rate announcement on Wednesday is noteworthy, it is not the only one.