USD/CAD treads water near 1.3750 as oil price retreats, Canada inflation in focus

• USD/CAD struggles to extend the recovery from two-week low, grinds near intraday top.
• US readiness to use SPR to battle OPEC+ supply cuts weighs on oil prices.
• Sluggish markets restrict immediate moves but firmer yields tease DXY buyers.
• With the BOC’s likely softer rate hike than the Fed’s the pair buyers remain hopeful.

USD/CAD steadies near 1.3750 amid sluggish markets during Wednesday’s European morning. In doing so, the Loonie pair seesaws around intraday high while trying to stretch the previous day’s rebound.

The quote’s resistance to decline could be linked to the latest retreat in oil prices, due to Canada’s reliance on WTI crude oil export, as the US eyes releasing more oil from its Strategic Petroleum Reserve (SPR) to battle the OPEC+ supply cut. WTI crude oil remains mildly bid at the fortnight low marked the previous day, retreating to around $83.70 at the latest.

On the other hand, the US Dollar Index (DXY) picks up bids while tracking the recently firmer US Treasury yields. That said, the US 10-year Treasury yields added two basis points (bps) near 4.02% mark at the latest.

The market’s inaction could be linked to the lack of major data/events, as well as mixed catalysts surrounding China and Russia. That said, the recently mixed covid numbers from China join Russia’s strong fight in Ukraine to challenge the sentiment. However, upbeat earnings and hopes of more stimulus from Beijing, Tokyo and the Eurozone keep the riskier assets firmer. On the same line could be the UK’s optimism due to the recent U-turn from the fiscal policies.

Elsewhere, Fed bets and the comments suggesting heavy rate hikes from the US central bankers underpin the US Treasury yields and the DXY of late. Earlier in the day, Minneapolis Federal Reserve Bank President Neel Kashkari said, “Until I see some compelling evidence that core inflation has at least peaked, not ready to declare a pause in rate hikes.” With this, the CME’s FedWatch Tool signals that markets are pricing in a nearly 95% chance of the Fed’s 75 rate hike in November.

It’s worth noting that the latest second-tier data from the US and Canada have been mixed but the Bank of Canada (BOC) and the Fed have both shown readiness to battle inflation and increase the benchmark rates. Even so, the hawkish pace at the Fed is much stronger than the BOC and hence the USD/CAD pair is likely to witness further upside if today’s Canadian Consumer Price Index (CPI) eases.

Forecasts suggest the CPI ease to 6.8% from 7.0% prior while the closely watched BOC CPI could also decline to 5.8% YoY versus 5.6% previous readings.

Technical analysis

Given the bearish MACD signals and the confirmation of the five-week-old rising wedge formation on Monday, USD/CAD is likely to remain on the bear’s radar unless it successfully crosses the 1.3850 immediate hurdle comprising the wedge’s lower line.