- USD / CAD is trading strongly higher on Thursday and is targeting a test of the 1.2600 level after climbing above the 1.2480 resistance.
- The pair is experiencing a late outperformance in the wake of Wednesday’s US CPI report.
The USD / CAD is experiencing late top performance on Thursday. In the wake of a much stronger-than-expected consumer price inflation (CPI) report on Wednesday, the US dollar rose against most of its G10 counterparts, but the loonie was largely spared at the time. This is because, when USD / CAD tried to climb further, it hit a wall of resistance around the 1.2480 level in the form of recent highs and its 200-day moving average. In the end, the USD / CAD ended the session rising only 0.4% (against other pairs that rose more like GBP / USD, EUR / USD and USD / JPY).
As trading volumes increased during Asian session hours, the pair was finally able to break above key resistance and subsequently spiked above the 1.2500 level towards the 50 DMA at 1.2535, and is currently closing in. to 1.2600. Oil prices fell sharply on Wednesday amid fears that higher inflation in the US will prompt the Biden administration to release crude oil reserves to combat high energy costs. Although prices are slightly higher on Thursday, they are still a bit far from recovering to pre-CPI data levels, so crude oil weakness is one of the reasons the loonie is falling sharply on Thursday.
Another reason for the low performance of the Canadian dollar is that, as a result of the US CPI data, the advantage of the Canadian rate over that of the US has been slightly eroded (as traders increase their bets on a more aggressive Fed in 2022). Yields on 5-year US government bonds rose 14 basis points to 1.22%, while Canadian 5-year bonds rose 10 basis points and failed to rise above 1.50% again . The government bond and short-term interest rate (STIR) markets still trade a much more aggressive BoC compared to the Fed.
But there is a growing crowd of economists / analysts who are beginning to believe that this view is wrong. According to CIBC, “the markets overvalued the Bank of Canada (BoC) stock in 2022 and underestimated the Federal Reserve after 2022.” “A recalibration”, the bank continues, “will leave CAD in disgrace with investors”, before concluding “we see that USD / CAD will move above 1.30 next year, as it is clear that the central bank of Canada it will not outperform the Federal Reserve. “