USD/CAD bears remain in control as risk appetite returns

• USD/CAD is down on the day as risk bounces mid-week.
• US/China tensions are eyed. Fed speakers, commodities and US data events are in focus. 

At 1.2850, USD/CAD is down 0.23%, falling from a high of 1.2891 to a low of 1.2832 so far on the day. The Canadian dollar is correcting Tuesday's fall that occurred at the start of the week due to investors being concerned over the rising tensions between the United States and China.

Risk has bounced, however, on Wednesday on a combination of dialled down Fed rate hike expectations and the fact that US House of Representatives Speaker Nancy Pelosi to Taiwan has not led to WW3. 

During a historic trip to Taiwan Wednesday, Pelosi said her visit was intended to make it "unequivocally clear" that the United States would "not abandon" the democratically governed island. However, China responded to Pelosi's trip by launching military exercises, which China's Ministry of Defense said began on Wednesday with drills in both the seas and airspace surrounding Taiwan. 

Frictions after the highest-level US visit to Taiwan in 25 years are likely to help support the safe-haven US dollar for now, which is presumed to weigh on the Canadian dollar, especially considering Canada is a major producer of commodities, including oil, so the currency tends to be sensitive to such tensions. 

Fed speakers in play

Nevertheless, the USD dollar index, which tracks the greenback against six major peers, has softened from a two-decade high in mid-July as investors reined in expectations of Fed rate hikes. It has sunk from the 109 area down to a recent low of 105.97 over the course of two weeks. However, a trio of Fed officials signalled on Tuesday the central bank remains "completely united" on increasing rates to a level that will put a dent in the highest US inflation since the 1980s. This has given the greenback a booster and lifted it to 106.819 over the course of the past few sessions.

However, its comeback has been halted by less hawkish comments from San Francisco Fed President Mary Daly who said on Tuesday that a year-end Federal Reserve interest rate of 3.4% is a "reasonable place" to get to. Daly, in an interview with Reuters, also said she does not believe the US central bank has yet reached the threshold for its policy rate to be considered restrictive, seeing that as more at the 3% level than the Fed's current policy rate range of 2.25% to 2.50% after last week's meeting.

She added, however, that 50 basis points would be a reasonable thing to do in September. ''We have a lot in the pipeline in tightening but yet to see that in data showing a slowing of the economy, but if we see inflation roaring ahead undauntedly then perhaps 75 be more appropriate.'' US rate futures pared back 75bp view in Sept after Fed's Daly comments. 

Meanwhile, US monthly jobs data due on Friday followed by Consumer Price Index on August 10 will help set the tone for the greenback. The consensus for Nonfarm Payrolls is 250k. That is down from 372k in June. The Unemployment Rate is expected to fall in at 3.6%.

As for positioning, speculators’ CAD net long positions strode higher but remain well below recent highs. The market is still quite confident in the Bank of Canada matching the Fed in terms of raising rates.