USD/CAD pokes 23-month high near 1.3270 as oil drops, DXY cheers hawkish Fed bias

• USD/CAD remains on the front foot around the highest levels since October 2020.
• Downbeat Canadian inflation contrasted mostly firmer US housing data, risk-off to favor bulls.
• Yields dribble around multi-year high to underpin USD strength ahead of Fed.
• Fears that aggressive rate hikes will curb demand weigh on oil prices.

USD/CAD grinds higher past 1.3350, close to 1.3370 at the latest, as bulls brace for the Fed showdown during early Wednesday. That said, fears of aggressive Fed rate hikes and downbeat prices of Canada’s key export item WTI crude oil propelled the quote towards the highest levels since October 2020 the previous day, taking rounds to the multi-day high of late.

WTI crude oil prints a three-day downtrend as it refreshes an intraday low near $83.40 by the press time. “The OPEC+ producer grouping - the Organization of the Petroleum Exporting Countries and associates including Russia - is now falling a record 3.58 million barrels per day short of its targets, or about 3.5% of global demand. The shortfall highlights underlying tightness of supply in the market, even as recession fears drag prices lower,” reported Reuters.

On the other hand, the US Dollar Index (DXY) prints mild gains around 110.25 as it pokes the two-decade high marked earlier in the month. In doing so, the greenback’s gauge versus the six major currencies cheers hawkish Fed bets and fears emanating from China and Russia.

While the Fed’s 75 basis points (bps) rate hike bore 83% chance, the latest chatters over the 1.0% rate lift seemed to have favored the risk-aversion. Nouriel Roubini, a well-known global economist, joined the league of Fed hawks on Tuesday. “The Fed started a two-day meeting on Tuesday, with rate futures traders pricing in an 83% chance of a 75 basis-point hike and a 17% probability of a 100 bps of tightening,” said Reuters.

The downbeat inflation in Canada and mixed US housing numbers are also the reason for the USD/CAD strength. That said, Canada’s Annual Consumer Price Index (CPI) declined to 7.0% versus 7.3% expected and 7.6% prior readings. Alternatively, the US Building Permits to 1.517M in August versus 1.61M forecast and 1.685M prior. However, Housing Starts improved to 1.575M compared to 1.445M market consensus and 1.404M previous readings.

On the other hand, Reuters reported that the Asian Development Bank (ADB) on Wednesday cut its growth forecasts for developing Asia for 2022 and 2023 amid mounting risks from increased central bank monetary tightening, the fallout from the war in Ukraine and COVID-19 lockdowns in China. Joining the line is the news of a snap lockdown in the steel hub of Tangshan, due to China’s zero covid policy, which recently challenged the market sentiment and strengthened the safe-haven demand. Furthermore, headlines suggesting US Senators’ demand for secondary sanctions on Russian oil also appear to challenge the market’s risk appetite.

Amid these plays, the S&P 500 Futures lick its wounds near 3,880 after declining the most in one week the previous day whereas the US benchmark Treasury bond yields retreat from the multi-day high. That said, the US 2-year Treasury yields jumped to the highest level in 15 years while the 10-year counterpart also rose to the 11-year top during the pre-Fed cautious mood.

Looking forward, the attention will be on how the Fed manages to avoid recession and still try to tame inflation, which in turn highlights today’s economic forecasts and a speech from Fed Chairman Jerome Powell as more important events than the interest rate announcement.

Technical analysis

Unless declining below a 13-month-old resistance line, around 1.3285 by the press time, USD/CAD remains on the way to October 2020 high near 1.3420.