USD/CAD inter-markets: buy the dips?

USD/CAD has returned to the 1.3200 neighbourhood today, correcting lower from recent peaks just above the 1.3300 handle while running out of steam in the boundaries of the 38.2% Fibo retracement of the 2016 drop in the 1.3310 area.

Yields in the US money markets remains USD-supportive today and keep favouring a wider spread with its Canadian peer, particularly in the shorter end of the curve, which reflects better the increasing expectations of a rate hike by the Federal Reserve. Furthermore, yields of the 2-year and 10-year benchmarks are currently trading in multi-month tops.

It is worth mentioning that Fed Funds futures prices assessed by CME Group’s FedWatch tool now points to a probability of higher rates by year-end at just above 63%.

Adding to USD-strength, the US Dollar Index keeps its march north unabated so far this week, reaching fresh 3-month peaks above the 97.00 handle and trading at shouting distance from the key tops in the 97.60 area seen in July.

Crude oil dynamics, the other key driver of CAD, seems to have been confined to the passenger’s seat when comes to determine the price action, all in favour of the US-CA 2-year yield differential.

Regarding FX, USD/CAD remains well underpinned by the 5-month support line, today at 1.2918, while the constructive tone is expected to remain intact above it. In the middle, dips to the 55- and 100-day sma along with the recent low around 1.3000 could well represent buying opportunities. On the upside, the immediate hurdle lines up at recent highs just above the 1.3300 barrier, reinforced by 1.3311, the 38.2% Fibo retracement of the 2016 drop. If cleared, there is not much in terms of relevant resistance levels until the next retracement in the 1.3570/75 area.