USD/CAD: Mildly bid near 1.2750 as softer oil prices join strong yields

USD/CAD remains on the front foot for the second consecutive day, picking up bids to 1.2740 during the late Asian session on Friday.

The loonie pair took a U-turn from the two-week low, also rose the most in a week, the previous day as markets reacted to the multi-year high US inflation data. Adding to the pair’s strength is the downbeat oil prices, Canada’s main export item.

The US Consumer Price Index (CPI) for January rallied to over a four-decade high with a 7.5% YoY figure, versus 7.3% expected and 7.0% prior.

Although the hot inflation figures were already expected, St. Louis Fed President James Bullard went a step farther while supporting 100 bps rate hikes by July and for the balance sheet reduction to start in the second quarter. Fed’s Bullard also cited the potential for 50 basis points (bps) of Fed rate hike in March. His comments added strength to the Fed rate hike concerns and propelled the US 10-year Treasury yields above 2.0% for the first time since July 2019, around 2.035% at the latest.

It’s worth noting, however, that Federal Reserve Bank of Richmond President Thomas Barkin tried to tame the bulls while saying that he would have to be convinced of a 'screaming need' for a 50 bps hike.

Elsewhere, WTI stays pressured around intraday low, down 0.60% on a day near $88.45. In doing so, the black gold justifies the US dollar’s negative correlation with the commodities while paying little heed to the geopolitical issues surrounding Russia. Also weighing on oil prices is the latest Organization of the Petroleum Exporting Countries (OPEC) oil demand forecast wherein it kept hopes of 4.15 million barrels per day (bpd) energy demand unchanged.

Given the risk-off mood and firmer Treasury yields, the US Dollar Index (DXY) remains firmer around 96.00, poking weekly high of late, which in turn keep USD/CAD buyers hopeful.

Moving on, the US Michigan Consumer Sentiment Index for February, expected 67.5 versus 67.2 prior, will decorate the calendar but traders will pay more attention to the risk catalysts mentioned above for clear direction.

Technical analysis

A clear upside break of the 50-DMA level surrounding 1.2710 directs USD/CAD buyers to a downward sloping resistance line from December 23, 2021, close to 1.2775-80 by the press time. That said, upbeat MACD and RSI also signal the pair’s further upside.