USD/CAD reverses BOC-inspired pullback as yields underpin US Dollar rebound

• USD/CAD braces for the biggest weekly gains in 10 as it grinds near one-month high.
• Fears of recession, US-China tussles join chatters surrounding Russia to weigh on sentiment.
• Rebound in US Treasury yields favors US Dollar bulls despite pre-Fed inaction.
• Second-tier data/events could offer intermediate moves ahead of important Friday.

USD/CAD picks up bids to 1.3685 as it pares the Bank of Canada (BOC)-led losses during early Thursday. In doing so, the Loonie pair takes clues from the US Dollar’s rebound while paying little attention to the recently firmer oil prices, Canada’s main export item.

US Dollar Index (DXY) reverses the previous day’s pullback from a one-week high around 105.35 while bracing for the first weekly gain in three. The greenback’s latest gains could be linked to the corrective bounce in the US Treasury bond yields, as well as the market’s consolidation ahead of the next week’s Federal Open Market Committee (FOMC) meeting.

It’s worth noting that the US 10-year Treasury bond yields dropped to the lowest levels since early September by losing 3.30% on Wednesday. On the same line, the two-year counterpart dropped 2.54% amid the rush for risk safety. As a result, the US Treasury bond yield curve, the difference between the long-dated and the short-term bond yields, inverted the most in over forty years and highlighted the recession woes. That said, the US 10-year Treasury yields add five basis points (bps) to 3.45% while the two-year coupons are at 4.295% at the latest.

Other than the rebound in yields, challenges to market sentiment also favor USD/CAD bulls. Russian President Vladimir Putin’s threat of using nuclear weapons contrasts with the latest comments from German Chancellor Olaf Scholz suggesting easing the risks of Moscow using nuclear weapons. Furthermore, China’s gradual easing of the Zero-Covid policy appears as a passive reopening and struggles to impress the bulls. Further, Bloomberg came out with the news suggesting more tension between the US and China due to the latest bills the US Congress is up for passing. “The US is set to pass legislation revamping US policy toward Taiwan and restricting government use of Chinese semiconductors, moves that appear certain to antagonize Beijing even as President Joe Biden seeks to ease tensions,” said Bloomberg.

Elsewhere, WTI crude oil bounces off the yearly low, up half a percent near $73.00, as demand fears ebb due to China’s easing Zero-Covid policy. However, economic slowdown woes and the firmer US Dollar challenge the black gold prices.

On Wednesday, the Bank of Canada (BOC) announced a 0.50% rate hike and weighed on the USD/CAD prices. However, the tone of the Rate Statement appeared dovish and challenged the Canadian Dollar (CAD) buyers.

Looking forward, USD/CAD bulls can keep the reins ahead of today’s weekly US Initial Jobless Claims, as well as Friday’s preliminary prints of the Michigan Consumer Sentiment Index and 5-year Consumer Inflation Expectations. However, major attention will be given to the next week’s Fed meeting as policy doves are flexing muscles of late.

Technical analysis

Wednesday’s Doji candlestick joins descending trend line from late October, around 1.3685 by the press time, to challenge USD/CAD buyers targeting October’s peak near 1.3810.