USD/CAD Analysis: Struggles to capitalize on the post-US CPI recovery from multi-year lows

• A strong pickup in the USD demand prompted some short-covering around USD/CAD on Wednesday.
• The US bond yields surged in reaction to a stronger US CPI report and provided a strong lift to the buck.
• A pullback in crude oil prices undermined the loonie and remained supportive of the attempted bounce.

The USD/CAD pair witnessed an intraday turnaround on Wednesday and rallied nearly 100 pips from six-year lows amid a broad-based US dollar strength. Against the backdrop of an extended selloff in the equity markets, the safe-haven USD got a strong lift following the release of hotter-than-expected US consumer inflation figures. The headline CPI rose 0.8% MoM in April and accelerated to a 4.2% YoY rate. This marked the fastest rise since September 2008 and was significantly above the Fed's 2% target. Adding to this, core CPI (excluding food and energy) increased 3.0% YoY during the reported month.

A surge in consumer prices fueled speculations about an earlier than anticipated tightening by the Federal Reserve. This was evident from a sharp intraday spike in the US Treasury bond yields, which provided an additional boost to the greenback. In fact, the yield on the benchmark 10-year US government bond jumped back closer to the 1.7% threshold and offset comments by the Fed Governor Richard Clarida, reiterating that inflation above 2% is due to transitory factors. Clarida also highlighted uncertainty about the labour market outlook, though did little to hinder the strong USD positive move.

Apart from this, a modest pullback in crude oil prices undermined the commodity-linked loonie and further prompted some short-covering around the major. Oil prices extended the previous day’s pullback from the vicinity of two-month tops and lost some additional ground during the Asian session on Thursday. This, in turn, continued lending some support to the pair, though a goodish rebound in the equity markets dented the greenback’s safe-haven status and capped gains. This, along with a more hawkish stance adopted by the Bank of Canada, warrants some caution for aggressive bullish traders.

Market participants now look forward to the US economic docket – highlighting the release of the usual Initial Weekly Jobless Claims and Producer Price Index (PPI) – for some impetus. This, along with the US bond yields and the broader market risk sentiment will influence the USD. Apart from this, oil price dynamics will further contribute to producing some meaningful trading opportunities around the major.

Short-term technical outlook

From a technical perspective, oversold conditions on short-term charts turned out to be a key factor that prompted traders to unwind some of their bearish bets. However, the lack of any strong follow-through buying makes it prudent to wait for some follow-through buying before confirming that the pair has bottomed out in the near term.

From current levels, any subsequent positive move is likely to confront a stiff resistance near the 1.2200 mark. The mentioned handle represents a confluence barrier comprising of a multi-month-old descending trend-channel support breakpoint and the 23.6% Fibonacci level of the recent decline from the pre-BoC highs near the 1.2655 region. That said, a sustained move beyond has the potential to push the pair further towards the 38.2% Fibo. level, around the 1.2275-80 region. The momentum could further get extended beyond the 1.2300 mark, though might remain capped near the 50% Fibo. level, around mid-1.2300s.

On the flip side, the 1.2100 round-figure mark now seems to protect the immediate downside. This is followed by the overnight swing lows, around the 1.2045 region, below which the pair seems all set to slide further towards challenging the key 1.2000 psychological mark. A convincing breakthrough should pave the way for additional weakness towards May 2015 swing lows, around the 1.1920 region.