USD/CAD recovery eyes 1.2700 as oil retreats, USD rise ahead of US ADP employment data

• USD/CAD defends the bounce off six-week low, grinds higher of late.
• BOC announced 0.50% rate hike, showed readiness to "act more forcefully if needed".
• Upbeat US data, hawkish Fedspeak underpin DXY’s biggest daily gains in a month.
• US ADP Employment Change, Factory Orders and Fed/BOC speakers eyed ahead of the key US NFP.

USD/CAD stays defensive around a two-month low, following the first positive daily close in six, as softer oil prices and strong US dollar tease buyers. That said, the Loonie pair seesaws around 1.2655-60 during an inactive start to Thursday’s Asian session.

The quote dropped to the lowest levels since early April just after the Bank of Canada (BOC) announced 50 basis points (bps) of rate hikes, matching market consensus. However, the important was the policymakers’ preparedness for aggressive rate lifts if needed to achieve its 2.0% inflation target.

It’s worth noting, however, that fears of growth and inflation, not to forget hawkish comments from the Fed policymakers, bolstered the US Dollar Index (DXY) and poured cold water on the BOC’s strong rate hike. Also fueling the USD/CAD prices was a retreat in the WTI crude oil prices, Canada’s key export.

Strong US data and Fed Beige Book raised concerns over economic growth and inflation in the US while Fed speakers renewed chatters surrounding a faster rate hike trajectory. That said, the US ISM Manufacturing PMI for April rose to 56.1 versus the 54.5 expected and the 55.4 prior. Further, the US JOLTs Job Openings eased below 11.8 prior readings but matched 11.4 market forecasts. It’s worth noting that the monthly release of the Fed Beige Book showed that the majority of districts indicated slight or modest growth while most informed of continued price rises. Also, three districts, out of 12, expressed concerns about a US recession.

Elsewhere, St. Louis Federal Reserve Bank President James Bullard also raised concerns about the US recession as he repeated that a pace of 50 bps hike per meeting is a “good plan” for now. Further, Federal Reserve Bank of Richmond President Thomas Barkin mentioned, “You can't find a recession in the data or actions of business execs,'' speaking on Fox Business.

It’s worth noting that WTI crude oil prices dropped for the second consecutive day on Wednesday, extending pullback from a three-month high to near $113.50 at the latest, as firmer US dollar and recession fears. Also, downbeat PMI data from China and anxiety ahead of today’s Organization of the Petroleum Exporting Countries (OPEC) meeting weigh on the black gold prices.

Amid these plays, the Wall Street benchmarks closed for the second day in the red while the US 10-year Treasury yields printed a three-day uptrend while refreshing a fortnight high near 2.95%.

Moving on, US ADP Employment Change for May, expected 300K versus 247K prior, will be eyed closed due to being the early signal for Friday’s US Nonfarm Payrolls (NFP). Also important to watch is the US Factory Orders for May bearing forecasts of a 0.7% increase compared to 2.2% in previous readouts. At home, an anticipated recovery in Canada Building Permits, to 0.7% from -9.3% prior, may test the USD/CAD rebound.

Also read: US ADP Employment Change May Preview: The labor market recedes from center stage

Technical analysis

A daily closing below 200-DMA, around 1.2665 by the press time, keeps USD/CAD directed towards a two-month-old support line near 1.2600.