USD/CAD Analysis: Defends descending channel support, at least for the time being

The USD/CAD pair struggled to capitalize on the previous day's modest bounce, instead met with some fresh supply on Wednesday and was pressured by a combination of factors. The dominant risk-on mood acted as a headwind for the safe-haven US dollar amid moderation of Fed rate hike expectations. This week's dismal US macro releases – Industrial Production and housing market data – pointed to weakening economic activity and tempered market expectations for an early policy tightening by the Fed. Adding to this, Fed Governor Randal Quarles said that it would be premature to start raising interest rates in the face of high inflation that is likely to recede next year. Quarles, however, reaffirmed that it is time for the Fed to begin dialling down its bond-buying program, though did little to impress the USD bulls.

On the other hand, hotter-than-expected domestic consumer inflation figures benefitted the Canadian dollar and exerted additional pressure on the major. Data published by Statistics Canada showed that the headline Canadian CPI advanced to 4.4% in September as against 4.3% anticipated and 4.3% previous. Moreover, the Bank of Canada's (BoC) Core CPI – excluding volatile food and energy prices – rose 3.7% during the reported period, beating consensus estimates for a reading of 3.6%. The commodity-linked further benefitted from bullish oil prices, bolstered by a surprise drop in the US crude inventories. The official report from the US Energy Information Administration (EIA) showed that commercial crude oil inventories declined by 0.4 million barrels in the week ending October 15 versus a build of 1.8 million barrels expected.

The pair finally settled near daily lows and momentarily slipped below the 1.2300 mark for the first time since late June during the Asian session on Thursday, though lacked follow-through selling. Fresh worries about a credit crunch in China's real estate sector tempered investors' appetite for perceived riskier assets and extended some support to the safe-haven USD. The heavily indebted developer – China Evergrande – said late on Wednesday that it abandoned a $2.6 billion sale of a stake in a subsidiary and that it had made no progress on other sales. This raised concerns that the troubled property giant could officially go into default following the expiry of a 30-day grace period to make the payment of a dollar bond coupon over the weekend. Apart from this, a modest downtick in oil prices assisted the pair to rebound over 40 pips from the 1.2290-85 area.

Market participants now look forward to the US economic docket – featuring the releases of the Philly Fed Manufacturing Index and the usual Weekly Initial Jobless Claims. This, along with a scheduled speech by Fed Governor Christopher Waller and the US bond yields, might influence the USD later during the early North American session. Traders will further take cues from the release of the Canadian ADP Employment Change report and oil price dynamics to grab some short-term opportunities around the major.

Technical outlook

From a technical perspective, the pair, so far, has managed to defend support marked by the lower boundary of a descending trend-channel extending from September monthly swing highs. A convincing break below the trend-channel support, currently around the 1.2290-85 region, will be seen as a fresh trigger for bearish traders. The pair might then turn vulnerable to accelerate the slide towards the next relevant support near mid-1.2200s before eventually dropping to test the 1.2200 round-figure mark.

On the flip side, any subsequent recovery move is likely to confront resistance near the 1.2375-80 region. This is closely followed by the 1.2400 mark, which if cleared decisively might trigger a short-covering around the pair. The momentum could then allow the pair to aim back to reclaim the key 1.2500 psychological mark. The latter represents a confluence hurdle comprising of the very important 200-day SMA and trend-channel resistance, which should cap any further gains, at least for the time being.