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USD/CAD spikes to 1.2400 neighbourhood amid stronger USD/sliding oil prices

  • A combination of factors assisted USD/CAD to gain some positive traction on Friday.
  • A softer risk tone, elevated US bond yields revived demand for the safe-haven USD.
  • Weaker Canadian GDP print, a fresh leg down in oil prices undermined the loonie.
  • The markets had a rather muted reaction to the mixed US PCE Price Index data.

The USD/CAD pair shot to fresh daily tops during the early North American session, with bulls making a fresh attempt to conquer the 1.2400 round-figure mark.

A strong follow-through uptick in the US Treasury bond yields allowed the US dollar to stage a solid rebound from one-month lows touched in reaction to dismal US GDP print on Thursday. This, in turn, was seen as a key factor that assisted the USD/CAD pair to attract some buying on the last day of the week and rally nearly 70 pips from the daily swing lows, around the 1.2330-25 region.

The intraday positive move picked up pace in the last hour following the release of the Canadian monthly GDP report, which showed that the economy expanded by 0.4% in August. This marked a notable recovery from a modest decline recorded in August but was well short of market expectations for a 0.7% growth and turned out to be a key factor that weighed on the Canadian dollar.

From the US, the Fed’s preferred inflation gauge – the Core PCE Price Index – held steady near 30-year highs in September and came in at 3.6% YoY, slightly below 3.7% anticipated. Additional details showed that Personal Income declined significantly, by 1.0% MoM, while Personal Spending rose +0.6% MoM. Nevertheless, the data indicated that consumer cost pressures are getting entrenched.

This, in turn, validated market expectations that the Fed would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. This was evident from elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond climbed back to 1.61%, which, along with a softer risk tone, continued benefitting the safe-haven greenback.

Apart from this, a fresh leg down in crude oil prices undermined the commodity-linked loonie, which was seen as another factor that provided a goodish lift to the USD/CAD pair. It will now be interesting to see if the pair is able to capitalize on the move and confirm a near-term bullish breakout through a downward sloping channel extending from September swing highs.

Technical levels to watch