USD/CAD slumps to 1.2520s after reaching monthly highs around 1.2600, as US T-bond yields fall

• USD/CAD falls on broad US dollar weakness amid falling US Treasury yields.
• According to BBH, Fed Fund futures sees a 66% chance of Q2 liftoff, while a Q3 hike is fully priced in.
• BoC Tiff Macklem: Economic slack is still not absorbed, but “we are getting closer.”

After reaching four-week highs, the USD/CAD slumps for the second day in a row, down 0.18%, trading at 1.2524 during the day at the time of writing. The fall is mainly driven by US dollar weakness, caused by a weaker than expected University of Michigan consumer sentiment that plummeted to a 10-year low in November amid concerns about the pace of elevated prices. Also, a leg down in US bond yields weighed on demand for the US dollar, which is on defensive mode as the week begins.

Meanwhile, crude oil prices fell as investors wait for the next move of the White House regarding high gasoline prices. Speculations are mounting that US President Joe Biden will release supplies from the Strategic Petroleum Reserve (SPR), which could weigh on the oil-commodity-linked Canadian dollar, that could lift the prospects of the USD/CAD pair. 

Fed bond taper week begins

According to Brown Brothers Harriman (BBH), on a note to customers said  “the New York Fed last week released an updated purchase schedule that will result in total purchases of $70 bln in USTS and $35 bln of MBS this month, $15 bln less than peak QE. How bonds trade this week will be significant in understanding the potential impact of tapering.” Further added that at that pace, the QE will end by June of 2022.

Moreover, BBH added that “Fed Funds futures still see nearly two-thirds odds of Q2 liftoff, which seems too soon, while Q3 liftoff is fully priced in. Strong data and rising inflation are likely to keep upward pressure on US rates.”

As of writing,  Tiff Macklem, BoC Governor, said that economic slack in the Canadian economy is still not absorbed but that “we are getting closer,” thus added that QE is no longer needed. Further added that if the BoC turns to be wrong about long-lasting inflation, they “will adjust.”

That said, the USD/CAD pair might consolidate, as according to investors, the Bank of Canada (BoC) is expected to raise rates sooner than the Federal Reserve, but a change of the pace of the Fed’s QE reduction could reduce the bond spread between the US and Canada, favoring the greenback in the medium-term.