USD/CAD: Firmer oil, risk-on mood favor sellers around 1.2800, Fed in focus

• USD/CAD fades rebound from intraday low, extends previous day’s losses.
• Oil prices benefit from API inventories, upbeat sentiment and headlines from China.
• Pre-Fed caution challenges sellers as tapering looms, Powell’s remarks are important too.
• US debt limit, geopolitical catalysts also prevail on the watcher’s list.

USD/CAD retreats to 1.2790, down 0.25% intraday, as European traders brace for the key Wednesday.

The Loonie pair drops for the consecutive day, extending the early week pullback from the monthly top as risk appetite improves in China’s return. However, firmer US Treasury yields underpin the US Dollar Index (DXY) gains, up 0.03% near 93.23 by the press time, amid the pre-Fed fears.

On the risk-positive side were the headlines from China, mainly relating to the People’s Bank of China’s (PBOC) heavy liquidity injection and Evergrande’s announcement of coupons payment on the expiry date of September 23. Previously, cautiously optimistic comments from the International Monetary Fund’s (IMF) Chief Economist Gita Gopinath over China’s ability to tame the fears emanating from the real-estate firm favored risk-on mood. On the same line were hopes of the extension to the US debt limit expiry the House votes 217-207 to favor temporary government funding and debt limit increase debate.

However, chatters over China’s other real-estate player, namely Guangzhou R&F, suspending the bond trading renew the US dollar’s safe-haven demand. Furthermore, the Bloomberg headlines indicating the EU-US push to curb China’s risk and the British-American ties, also joined by Australia, to challenge Beijing to weigh on the mood.

It should be noted that WTI oil price strength, up 0.82% to $71.35 at the latest, exerts additional downside pressure on the USD/CAD prices. As oil is Canada’s biggest export, the latest positives from China and weaker-than-previous inventory draw, per the weekly American Petroleum Institute (API) data, favor the commodity bulls.

Furthermore, the victory of Justin Trudeau in the Canadian Federal Elections, despite lacking a majority, adds to the Canadian Dollar (CAD) strength.

Looking forward, Fed tapering concerns and West versus Beijing story may entertain USD/CAD traders.

Read: Fed Preview: Three ways in which Powell could down the dollar, and none is the dot-plot

Technical analysis

Failures to cross the 1.2830 hurdle, followed by a downside break of a two-month-old support-turned resistance near 1.2800, keep USD/CAD sellers hopeful.