USD/CAD consolidates its recent gains to over a two-month high, around mid-1.3500s

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• USD/CAD oscillates in a narrow trading band during the Asian session on Friday.
• Retreating US bond yields keep the USD bulls on the defensive and cap the upside.
• The Fed’s hawkish outlook, a softer risk tone to limit losses for the USD and the pair.

The USD/CAD pair enters a bullish consolidation phase during the Asian session on Friday and oscillates in a narrow trading band just below mid-1.3500s, or its highest level since June 1 touched the previous day.

The US Treasury bond yields pullback after hitting a multi-year peak on Thursday, which holds back the US Dollar (USD) bulls from placing fresh bets and acts as a headwind for the USD/CAD pair. That said, growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer should limit any meaningful downside for the US bond yields and the USD. In fact, the July 25-26 FOMC policy meeting released on Wednesday revealed that policymakers continued to prioritize the battle against inflation, though were divided over the need for more rate hikes.

Moreover, the incoming US macro data pointed to an extremely resilient economy and support prospects for further policy tightening by the Fed. Apart from this, the prevalent risk-off environment further lends support to the safe-haven Greenback and the USD/CAD pair. China’s second-large realtor – Evergrande – and Tianji Holdings – a related company – filed for protection from creditors in a US bankruptcy court on Thursday. This adds to worries about the worsening economic conditions in China and leads to a further decline in the global equity markets.

Adding to this, worries that headwinds stemming from rapidly rising borrowing costs will dent demand fail to assist Crude Oil prices to capitalize on the overnight recovery from a two-week low. This, in turn, is seen undermining the commodity-linked Loonie and suggests that the path of least resistance for the USD/CAD pair is to the upside. Hence, any meaningful corrective decline might still be seen as a buying opportunity and is likely to remain limited in the absence of any relevant market-moving economic data, either from the US or Canada.

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