USD/CAD bulls reach out to the 61.8% Fibo, markets on Fed alert

• USD/CAD is correcting from the highs as the markets in North America wind down. 
• A volatile day sees USD/CAD take on a 61.8% daily retracement in bullish territory. 

USD/CAD bulls have been back in control in the past two days after testing a bullish 200-day moving average. More on that below. Meanwhile, USD/CAD headed for a close near 1.2750 into the closing bell on Wall Street. USD/CAD has travelled from a low of 1.2668 to a high of 1.2774. 

Market on Fed alert

Markets are in anticipation of a reduction in the US Federal Reserve's asset purchases by the end of the year and an interest rate hike that could come as soon as late next year. This has propelled the US dollar to a fresh 10-1/2-month peak against rival currencies. The US dollar has also benefitted from fears of a global slowdown, a rise in energy prices and higher US Treasury yields. The US 10-year yield was up 1bp to 1.54%.

By contrast, the Canadian 10-year yield eased 2.3 basis points to 1.477%. The dollar index, which measures the US currency against a basket of six major currencies has claimed for the fourth consecutive day to 94.432, its highest since September last year. It was last up 0.71% at 94.385. (Canada's bond market will be closed on Thursday for the National Day for Truth and Reconciliation).

Oil prices pressured

Meanwhile, oil was pressured by an unexpected rise in US crude inventories and concerns about a slowing Chinese economy. Brent crude settled down 45 cents to $78.64 a barrel, after reaching $80 on Tuesday. US oil prices ended down 46 cents, or 0.6%, to $74.83 a barrel. WTI spot, on the other hand, was higher by 0.6% in the last hour of trade on Wall Street. 

In other related news for CAD, Producer prices in Canada fell by 0.3% in August from July on lower prices for softwood lumber, Statistics Canada said on Wednesday. However, there were up 14.3% from August last year. On the political side of things, Canadian Prime Minister Justin Trudeau said on Tuesday he will swear in his new Cabinet next month, with Chrystia Freeland returning as his finance minister and deputy after his Liberals were re-elected for the third time. Looking ahead for CAD-related data, Gross Domestic Product data for July is due on Friday, which could provide clues on the Bank of Canada policy outlook.

US debt ceiling risks 

Meanwhile, the wild card for the US dollar is seen in the risk related to the US Senate Republicans that on Tuesday blocked a bid by President Joe Biden's Democrats to head off a potentially catastrophic US credit default. Federal funding is due to expire on before the end of the week, Thursday, and the borrowing authority deadline is as soon as 18 Oct. 

The House Democrat leaders remain far short of votes they need to pass an infrastructure bill. The Senate GOP is still blocking the Dems' ability to raising the debt limit on the floor and say it needs to be done through reconciliation. The extent of the economic costs of the debt limit binding, while assuredly negative, are enormously uncertain.

The greenback has benefitted of late from risk-off sentiment, however, if confidence is lost in the US and all things denominated in the greenback, then that would be expected to be a weight as investors turn to alternative safe-havens, such as the Japanese yen.  

USD/CAD technical analysis

USD/CAD is in the middle of its one-month trading range, while the other majors are trading at 6-month to 18-month lows. Prospects for an improving Canadian economy, and still relatively high oil prices have limited the CAD's slide. However, the price rides in bullish territory still and a break of the 61.8% Fibonacci retracement could be signalling higher levels to follow in coming days.