- Canada December CPI expected at 4.8% y/y
- Rate hike fears weigh on equity markets
- US dollar opens lower compared to Tuesday
USDCAD Snapshot: Open 1.2470-74, Overnight Range-1.2474-1.2573, previous close 1.2512, WTI open $86.81, Gold open $1818.97
The Canadian dollar is once again attempting to break through resistance and launch another rally. Trading has been erratic this week with stock markets and oil prices competing to drive direction. That relationship was on full-display Tuesday.
Markets are pricing in four Fed rate hikes in 2022 after the US 10-year Treasury yield climbed to 1.90%. The increase in Treasury yields appear to have taken equity markets by surprise. Yesterday, the tech-heavy NASDAQ index plunged 2.60%, the S&P 500 index lost 1.84% and the Dow Jones Industrial Average fell 1.54%.
USDCAD reacted and rallied from 1.2495 in the morning to 1.2560 just after lunch. The move was quickly reversed even though equity indexes were still falling. That’s because oil prices were on a tear, with West Texas Intermediate (WTI) rising from $84.50/barrel to $87.04 overnight. WTI has gained over 26% since the beginning of December and analysts expect prices to rise further.
Oil prices gains are supported by the latest supply disruption. A major pipeline between Iraq and Turkey is out of commission due to an explosion. More importantly, the Opec Monthly Oil Report, due today, is expected to reduce its H1 2022 oil surplus forecast.
The Canadian dollar has further upside. Monday’s BoC Business Outlook Survey conclusions raised the odds for a rate hike at next week’s monetary policy meeting, and a higher than expected Canadian CPI reading (above 4.8% y/y) will all but confirm it. If so, the Canadian dollar should extend recent gains.
EURUSD traded in a 1.1320-1.1349 range. German HICP was confirmed at 5.7% but was largely ignored. The divergent Fed and ECB outlooks argue for a lower EURUSD with a break below 1.1310 targeting 1.1210.
GBPUSD climbed from 1.3590 to 1.3643, supported by higher than expected December CPI data (actual 5.4% y/y vs forecast of 5.2% y/y), which raises expectations for the BoE to raise rates at the February meeting. UK political drama may limit gains, especially if disgruntled Tories secure enough votes to give Boris the boot.
USDJPY dipsy-doodled in a 114.22-114.78 band, underpinned by rising US rates, while broad US dollar weakness, especially against commodity currency bloc, and minor risk aversion sentiment from new COVID-19 restrictions in Tokyo weighing on prices.
NZDUSD is the best performing major G-10 currency overnight. Prices climbed from 0.6767 to 0.6797 after ANZ Bank suggested the RBNZ would raise rates to 3.0% by April 2023. AUDUSD is trading at its session peak in NY.
