USD / CAD recovers above 1.2750, more than 1.0% on the first trading day of 2022 as US yields rise.

• USD / CAD is back above 1.2750, its biggest one-day gain since November.
• The dollar is strengthening amid a surge in US yields that weighs more on risk-sensitive currencies like the CAD.

It’s been a rocky and mixed start to the year in global financial markets, with stocks on the rise in the US and Europe, oil prices swinging between gains and losses, while other commodities are hit by a US dollar. significantly stronger. The US dollar appears to be being driven by a safe-haven offering that seems concentrated purely in the currency markets (otherwise equities would be lower), and this has also seen the yen supported (hence the two currencies are of the G10 with better performance). Commodity- and risk-sensitive currencies such as the Canadian, Australian and New Zealand dollars have been hit hard, each down 1.0-1.2% on the day against the dollar.

There is no specific news event / fundamental catalyst behind the indecisive and mixed tone of the market on Monday. In particular, for currency markets, US bond yields are on the rise, with 10-year yields rising 10bp on the day to the 1.60% level. Unusually this does not appear to have an effect on the outperforming yen (which is generally very vulnerable to higher US yields), but it does appear to be affecting the rest of the G10. With the Canadian, Australian and New Zealand bond markets closed on Monday for the late New Year’s Day holiday, the CAD, AUD and NZD have been deprived of protection from an upward movement in their respective bond yields from the US. government that could have protected currencies from gains driven by the US dollar yield rally.

As for why US yields are increasing, analysts at TD Securities said that “it appears that today’s sell-off is being driven by the market that believes the Federal Reserve could still rally in mid-2022 despite the increase in COVID cases “. It’s worth adding “that it is still early in the New Year and most of the world is going on vacation, so lower liquidity may certainly be exacerbating market movements,” the analyst said.

In recent hours, USD / CAD has risen north of the 1.2750 level again, having started 2022 below 1.2650. That equates to a daily gain of about 1.0%, marking the pair’s best one-day performance since Nov. 26, the day the world first panicked with Omicron. The pair is likely to find some resistance at the 1.2800 area, given that this area coincides with the 21-day moving average and has been an important break-even area in the past. In the grand scheme of things, Monday’s move is not significant as it leaves USD / CAD trading near the center of December’s 1.2600-1.2950 ranges.

Technical levels