USD/CAD Analysis: Sliding oil prices offset weaker USD and prompt some short-covering

• USD/CAD staged a goodish intraday bounce from a multi-week low touched on Monday.
• A slump in oil prices undermined the loonie and extended support despite a weaker USD.
• Sustained strength beyond the 1.2950-60 area is needed to confirm a near-term bottom.

The USD/CAD pair managed to defend the 100-day SMA support and staged a goodish bounce from a seven-week low, around the 1.2765 region touched on Monday. A sharp fall in crude oil prices undermined the commodity-linked loonie and turned out to be a key factor that prompted some short-covering around the major. Weak manufacturing data from the United States, Europe and Asia revived fears about a global economic downturn. This, along with the imposition of strict COVID-19 controls in China, raised worries over the global oil demand and dragged the black liquid to its lowest level since July 14.

The intraday positive move, meanwhile, seemed rather unaffected by the prevalent US dollar selling bias. The Fed last week hinted that it could slow the pace of the rate hike campaign at some point. Furthermore, the Advance US GDP report released last Thursday confirmed a technical recession and fueled speculations that the Fed would not hike rates as aggressively as previously estimated. This was reinforced by the recent slump in the US Treasury bond yields and continued weighing on the buck, which failed to gain any respite from mixed results of the US manufacturing business survey.

In fact, the headline US ISM Manufacturing PMI edged lower to 52.8 in July as against expectations for a decline to 52.0 from the 53.0 previous. Additional details revealed that new orders contracted for the second straight month, suggesting that the economy is cooling. Furthermore, the employment sub-component remained in the contraction territory as well, while the prices paid sub-component declined sharply to 60.0. The data, however, did little to hinder the USD/CAD pair's strong intraday recovery, which extended through the Asian session on Tuesday amid a further decline in crude oil prices.

The USD, on the other hand, prolongs its downfall and drops to its lowest level since July 5. This might hold back traders from placing aggressive bullish bets around the USD/CAD pair and keep a lid on any meaningful upside, at least for the time being. Market participants now look forward to the Canadian Manufacturing PMI, which, along with oil price dynamics, could influence the Canadian dollar. Traders will further take cues from the US JOLTS Job Openings. Apart from this, the US bond yields and the broader risk sentiment would drive the USD demand and provide some impetus to the major.

Technical Outlook

From a technical perspective, spot prices showed some resilience below the 61.8% Fibonacci retracement level of the 1.2518-1.3224 strong rally and the 100-day SMA. The said confluence, currently around the 1.2790-1.2780 region, should now act as a key pivotal point. A convincing breakthrough would be seen as a fresh trigger for bearish traders and make the USD/CAD pair vulnerable. Spot prices could then accelerate the fall towards the 1.2700 round-figure mark before eventually dropping to the next relevant support near the 1.2655-1.2650 zone.

On the flip side, any further recovery beyond the 1.2870-1.2875 region (50% Fibo. level) might confront stiff resistance near the 1.2900-1.2910 supply zone. That said, a sustained strength beyond has the potential to lift the USD/CAD pair back towards the mid-1.2900s, or the 38.2% Fibo. level. Some follow-through buying would suggest that spot prices should pave the way for a move towards reclaiming the 1.3000 psychological mark en-route the 1.3055-1.3060 region, or the 23.6% Fibo. level.