USD/CAD bears in charge and target a breakout for fresh cycle lows

• USD/CAD is under pressure with the themes surrounding the BoC in focus. 
• The week is a busy schedule for CAD considering the data and FSR at the end of the week. 

At 1.2536, USD/CAD is pressured and has made fresh cycle lows this week, probing bullish commitments that are so far dwindling. The US dollar, as, per the US dollar index (DXY) fell against a basket of major currencies as US equities shook off an early risk-off mood and in turn, the Canadian dollar strengthened to its highest level in nearly seven weeks.

Oil prices have climbed and Canadian bond yields have advanced further above their US counterparts, leaving the bias with the bears for the sessions ahead. The gap between Canadian and US 10-year yields widened by 4.5 basis points to 20 basis points in favour of the Canadian bond, the widest spread since August 2012. 

This comes down to growth prospects and the central banks. While the markets are anticipating continued hikes at the Federal Reserve, the Bank of Canada is also saying it was prepared to act "more forcefully if needed" to bring inflation back to target. The BoC has already hiked by two-second consecutive half-percentage points.

The focus will very much stay with this theme for the end of the week with the BoC's Financial Stability Report which is expected to shine light on risks and vulnerabilities to the financial system. Analysts at TD Securities said that they ''do not expect any implications for the near-term policy outlook.''

''We will be watching for any new detail on high-leverage borrowers or mortgage delinquencies, but expect an overall message that the financial system remains resilient amid a rising interest rate environment.''

 We'll also hear from Governor Macklem on Thursday.

In recent data, ''Canada's trade surplus narrowed unexpectedly to C$1.5 billion in April as both imports and exports slowed, but economists said the lull was likely temporary, with supply chain disruptions easing and oil exports set to rebound,'' Reuters reported. 

''Ivey Purchasing Managers Index data showed that Canadian economic activity expanded at a faster pace in May as a measure of employment climbed to its highest level in 11 months.''

Meanwhile, traders will also look to Friday's employment report. ''We look for the Canadian labour market to rebound with 35k jobs created in May following the muted performance in April,'' analysts at TD Securities said. ''This reflects a solid increase for mobility trends, record job vacancies, and the sharp drop for COVID infections after the post-Omicron wave. A 35k print would leave UE unchanged at 5.2% (after rounding), but we should see wage growth firm into the high 3s.''

Analysts at RBC Economics said in a note recently that the ''concerns about the Canadian economy’s ability to handle rapidly rising borrowing costs could still exert some downward pressure on the Canadian dollar, which at 79.5 US cents is still well within the roughly 77-81 cent range that has held for nearly a year. But interest rate differentials might not be quite as much of a currency driver as we previously envisioned.''