USD/CAD off lows, still in the red below mid-1.2300s

• A combination of factors prompted fresh selling around USD/CAD on the last day of the week.
• A generally positive risk tone weighed on the safe-haven USD and exerted downward support.
• An uptick in crude oil, stronger Canadian data underpinned the loonie and added to the selling.

The USD/CAD pair refreshed daily lows in reaction to better-than-expected Canadian macro data, albeit quickly recovered a few pips thereafter. The pair was last seen trading around the 1.2335 region, still down nearly 0.25% for the day.

The pair met with fresh supply on Friday and eroded a major part of the previous day's recovery gains from sub-1.2300 levels or four-month lows. The downfall was sponsored by renewed US dollar selling bias and a pickup in crude oil prices, which tend to underpin the commodity-linked loonie.

Easing worries about a credit crunch in China's real estate sector boosted investors confidence on the last day of the week. This was evident from a generally positive tone around the equity markets, which, in turn, was seen as a key factor that dented the greenback's relative safe-haven status.

On the other hand, the Canadian dollar benefitted from a fresh leg up in crude oil prices and slightly better-than-expected domestic data. Statistics Canada reported that Retail Sales rose 2.1% MoM in August as against the 0.6% decline reported in the previous month and 2% growth anticipated.

That said, elevated US Treasury bond yields – amid hawkish Fed expectations – should help limit any deeper USD losses and act as a tailwind for the USD/CAD pair. Investors seem convinced that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation.

Hence, the market focus would be on Fed Chair Jerome Powell's remarks during a virtual panel discussion later this Friday. This, along with the release of flash US Manufacturing/Services PMI and the US bond yields, will influence the USD and provide some impetus to the USD/CAD pair.

Technical levels to watch