USD/CAD inter-markets: preparing for a rebound back towards 1.3200 handle?

After last week's FOMC statement, a broad US Dollar weakness has been the key theme in the FX market. Adding to this, lower-than-expected second-quarter US GDP growth further aggravated the selling pressure around the greenback. 

The USD/CAD pair, too, reversed sharply and erased nearly 250-pips from its highest level since late March touched after the Fed announcement. Further slide, however, was limited as continuing weakness in WTI crude oil (to over 3-month lows) dented demand for commodity-linked currency - Loonie and assisted the pair to post a recovery on Monday, back above 1.3100 handle. 

The recovery, however, turned out to be short-lived as Tuesday's rebound in crude oil prices helped the Canadian Dollar to erase all of its previous day's losses. Adding to this, diminishing prospects of an eventual Fed rate hike in 2016, as represented in FedFund futures, is further exerting a broad based selling pressure around the USD/CAD pair that is currently trading back around 1.3000 psychological mark. 

The latest leg of downslide in the major has been accompanied by a sharp rise in US and Canadian 10-year treasury yields and declining yield spread between the bond yields. Historically declining yield spread has proved supportive for the US Dollar. Hence, any further contraction and a minor retracement in crude oil price would now trigger a sharp short-covering rally. 

Even from technical perspective, despite of recent US Dollar weakness the pair has been oscillating around 200-day SMA, which seems to indicate a consolidation phase before the pair resumes its previous appreciating move. Hence, a recovery back above 200-day SMA resistance near 1.3080 could lift the pair back towards 1.3200 handle.