USD/CAD hits a fresh daily low below 1.2900 as sellers stepped in on high oil prices

• The USD/CAD slid almost 0.80% on Monday on a risk-on mood, soft US dollar, and elevated oil prices.
• Last week’s US inflation data, mainly core-CPI, eased worries of a Fed 100 bps rate hike, as most policymakers pushed back against it.
• Canada's inflation and retail sales would shed some light, on the BoC’s forward path, after the BoC jumbo hike.

The USD/CAD slides for the second straight day, erasing last Thursday’s gains, and is back below last week’s low at 1.2936, due in part to a softer US dollar, retracing from 108.000, almost 1% amidst an upbeat market mood, cheered on speculation that the Fed would not tighten as aggressively as previously expected.

Therefore, the USD/CAD is trading at 1.2924, slumping below the 200-hour simple moving average (SMA), breaking under 1.3000, and hitting a daily low at around 1.2898, which would exacerbate a test of the MTD lows at 1.2837 on a week of a light US calendar, and also as Fed speakers entered the blackout period.

USD/CAD drops on a risk-on mood, a softer greenback, and elevated oil price

Global equities are rising sharply. US Treasury yields rise as the US 10-year T-note broke above the 3% threshold, as market players scale back flows to safety. Traders shrugged off worries about China’s recent Covid-19 outbreak, despite reporting 580 local cases on Saturday. In the meantime, high crude oil prices, mainly WTI, climbed 4.549%, exchanging hands at $98.92 BPD, bolstering the Canadian dollar, a headwind for the greenback.

The US calendar will feature housing data as the spotlight on Monday, though market players focus on inflation and growth, so their reaction would be interesting. During last week’s, US inflation kept at higher levels; in both readings, consumers and prices paid by producers. Nevertheless, core CPI stood below the 6% threshold, falling for the third consecutive month, illustrating that food and energy are the most significant contributors to the high inflation rate.

That said, Fed expectations of a 100 bps have faded so far. The CME FedWatchtool shows 30% odds of an extra-large rate rise, but stills show a priced-in 75 bps hike, in line with what most Fed policymakers expressed, namely Waller, Bullard, Mester, and Daly. The only exception was Atlanta’s Fed President Raphael Bostic, which stated that “everything is on the table” after the release of June’s CPI.

Elsewhere, the Bank of Canada surprisingly raised rates more than expected, a 100 bps, emphasizing that they would do what’s needed to tame inflation. Additionally, at the press conference, the BoC Governor Macklem said that front-loading rate increases now would help avoid even higher rates in the future while adding that front-loaded cycles tend to be followed by softer landings.

What to watch

The week ahead, the Canadian docket will feature Housing Starts, Inflation data, and Retail sales. The calendar will be packed on the US front, Housing Starts, Building Permits, Existing Home Sales, Initial Jobless Claims, and July’s S&P Global PMIs.

USD/CAD Key Technical Levels