USD/CAD rallies above 1.2750, up over 1.0% on first trading day of 2022 as US yields surge

• USD/CAD has surged back to the north of the 1.2750 mark, its biggest one-day gain since November.
• The dollar is strengthening amid a surge in US yields that is weighing most heavily on risk-sensitive currencies like CAD.

It’s been a choppy, mixed start to the year in global financial markets, with equities higher in the US and Europe, oil prices swinging between gains and losses, whilst other commodities are hammered by a significantly stronger US dollar. The US dollar seems to be being driven by a safe haven bid that seems concentrated purely in FX markets (otherwise stocks would be lower), and this has also seen the yen supported (hence why they are the two best performing G10 currencies). Commodity and risk-sensitive currencies such as the Canadian, Australian and New Zealand dollar’s have all been getting hit hard and are each down 1.0-1.2% on the day versus the buck.

There isn’t one specific news event/fundamental catalyst behind Monday’s indecisive, mixed market tone. Notably, for FX markets, US bond yields are surging, with the 10-year up 10bps on the day to 1.60%. Unusually, this doesn’t seem to be having an effect on the outperforming yen (which is typically highly vulnerable to higher US yields), but it seems to be weighing on the rest of the G10. With Canadian, Australian and New Zealand bond markets shut on Monday for belated New Year’s Day holiday, CAD, AUD and NZD have all been robbed of the protection of a move higher in their own respective government bond yields that might have shielded the currencies from the dollar’s US yield rally-driven advances.

As to why US yields are surging, analysts at TD Securities said “it appears the sell-off today is being driven by the market viewing the Federal Reserve as still being likely to hike by mid-2022 despite the surge in COVID cases”. It's worth adding “that it's still early in the New Year and most of the world is off for the holiday, so thinner liquidity may certainly be exacerbating market moves” the analyst said.

In the last few hours, USD/CAD has surged back to the north of the 1.2750 level, having started 2022 underneath 1.2650. That amounts to an on-the-day gain of about 1.0%, which marks the pair’s best one-day performance since 26 November, the day the world first panicked about Omicron. The pair is likely to find some resistance in the 1.2800 area, given this area coincides with the 21-day moving average and has been an important balance area in the past. In the grand scheme of things, Monday’s move isn't significant, as it leaves USD/CAD trading close to the centre of December’s 1.2600-1.2950ish ranges.