USD/CAD bulls flirt with 1.2900 amid firmer DXY, softer oil prices, focus on Canada inflation

• USD/CAD seesaws around weekly top after positing the biggest daily jump in a month.
• Economic fears surrounding China, and an increase in oil output in Permian favor WTI bears.
• Risk-off mood also underpins bullish bias ahead of the key data/events.

USD/CAD bulls take a breather around 1.2900, following the longest daily jump in a month, as traders await the key inflation data from Canada. In addition to the pre-data anxiety, the cautious mood in the markets and sluggish prices of Canada’s main export item, WTI crude oil, also probed. The Loonie pair buyers during Tuesday’s Asian session.

WTI crude oil remains sidelined around a six-month low, pausing a two-day downtrend, as bears seek fresh clues to extend the latest south-run. Even so, the black gold remains weak amid chatters of economic weakness in the world’s largest commodity user China and increased output from the Permian basin. “Oil output in the Permian in Texas and New Mexico, the biggest U.S. shale oil basin, is due to rise 79,000 barrels per day (bpd) to a record 5.408 million bpd in September, the U.S. Energy Information Administration (EIA) said in its productivity report on Monday,” per Reuters.

Elsewhere, China’s Retail Sales eased to 2.7% YoY in July versus 5.0% expected and 3.1% prior whereas Industrial Production (IP) edged lower to 3.8% during the stated month, from 3.9% prior and 4.6% market forecasts. Additionally, the People’s Bank of China (PBOC) surprised markets on Monday by cutting the one-year medium-term lending facility (MLF) rates by ten basis points (bps) and trying to push back the bears.

Headlines are suggesting improved coronavirus conditions in China's financial hub Shanghai and the resumption of the Russian bonds’ trading on Wall Street should have favored the risk appetite, but could not. Furthermore, hopes of a probable meeting between US President Joe Biden and his Chinese counterpart Xi Jinping, as signaled by the Wall Street Journal (WSJ), could favor the risk-on mood. On the same line were comments from China’s President Xi suggesting more efforts to revive the world’s second-largest economy.

It should be noted that the Federal Reserve (Fed) policymakers held their hawkish bias, despite recently downbeat US data, while suggesting the need for more proof of softer inflation. The latest from the Fed was Richmond Federal Reserve (Fed) Bank President Thomas Barkin, who said he wants to raise interest rates further to bring inflation under control. "I'd like to see a period of sustained inflation under control, and until we do that I think we are just going to have to move rates into restrictive territory," Barkin told CNBC, per Reuters.

That said, US NY Empire State Manufacturing Index for August, which dropped to -31.3 from 11.1 in July and 8.5 market forecasts, contributed to the economic slowdown fears. On the same line, the US August NAHB homebuilder confidence index also fell to 49 versus 55, its lowest level since the initial months of 2020.

While portraying the mood, the US 10-year Treasury yields dropped six basis points (bps) to 2.79% whereas Wall Street closed with mild gains. It should be noted that the S&P 500 Futures print mild losses by retreating from a three-month high by the press time.

Looking forward, China headlines may entertain USD/CAD traders ahead of July's Canadian Consumer Price Index (CPI). More important to track will be the Bank of Canada (BOC) Core CPI, expected 6.7% YoY versus 6.2% prior.

Technical analysis

A successful upside break of a one-month-old previous resistance line, now support around 1.2880, directs USD/CAD buyers towards the monthly peak of 1.2985.