USDCAD drops from 1.3350 as risk impulse holds optimism, oil turns sideways

• USDCAD has witnessed barricades around 1.3350 amid positive market sentiment.
• Loonie bulls are supported by BOC’s hawkish commentary and a recovery in oil prices.
• Going forward, US long-term inflation report will be of utmost importance.

The USDCAD pair has sensed selling pressure around 1.3350 in the Tokyo session after attempting a pullback move around 1.3300. The asset has turned sideways which indicates further inventory distribution, which will deliver more weakness in the counter.

Meanwhile, the risk profile has strengthened further as S&P500 futures are extending their gains post a bumper rally on Thursday. The US dollar index (DXY) has refreshed its day’s low at 108.00 and is expected to display more downside ahead.

A sheer decline in US inflation brought a bloodbath in US government bonds. The 10-year US Treasury yields dropped to 3.8% as chances from the CME FedWatch tool claim that 75 basis points (bps) rate hike is losing its stream now.

Going forward, investors will focus on long-term US inflation expectations. The US economy is needed to pass this test too as an increment in the longer-term inflation indicator may spoil the party for risk-perceived assets.

The Fed has been continuously reiterating that their long-term inflation expectations are well-anchored at around 2%. And, previously the economic data landed at 2.9%.

Meanwhile, Loonie bulls are supported by a hawkish commentary from the Bank of Canada (BOC) Governor Tiff Macklem and a decent recovery in the oil prices. BOC Governor cited that “Canadians should expect even more rate hikes to come on top of six that have already happened this year,” during an interview with CBC News in the late New York session.

He further added that layoffs will increase, the growth rate may come to zero in the next few quarters, and the central bank is fine with a mild recession as a price to bring down inflation to desired levels.

Oil prices have rebounded as a decline in US inflation has trimmed the risk of recession. A slowdown in the rate hike pace by the Fed may bring a recovery in the scale of economic activities, which will eventually accelerate oil demand ahead.