USD/CAD bulls hold the fort as oil prices wobble

• USD/CAD on the front foot as oil declines, China demand weakens. 
• Fed and BoC coming into focus beyond oil prices.

USD/CAD is flat on the session and has moved in a relatively tight range of just 15 pips between 1.1513 and 1.12530 so far.  The Canadian dollar weakened against the greenback at the start of the week, ducking below a two-month high, as oil prices tumbled and the greenback broadly climbed.

The moves follow nine straight days of gains for the loonie, the longest winning streak since August 2016. On Friday, the pair reached the best level since Jan. 20 at 1.2462. Speculators’ net CAD long positions fell back into negative ground though. However, the loonie has fought back against the USD in the spot market in recent sessions on the back of stronger oil prices.

Meanwhile, the price of oil, one of Canada's major exports at the start of the week dropped as Shanghai entered a two-stage lockdown of 26 million people in an attempt to curb the spread of COVID-19. ''China's most intense hit to mobility since the initial wave of Covid-19 lockdowns is weighing heavily on energy prices,'' analysts at TD Securities explained.

''While our tracking of Shanghai traders' metals positioning suggests confidence that Chinese production will remain resilient, the lockdowns are translating into a significant hit to mobility. As of last week, road traffic in China had collapsed by nearly 10% on the month amid Omicron's explosive spread, a figure which appears likely to intensify amid imminent lockdowns.''

''We still expect that Brent crude will continue to rally as the market continues to price-in a rise in energy supply risk amid immense supply disruptions. The right tail in energy markets is still fat, as effective spare capacity across OPEC+ is stretched thin, while OECD inventories reach their lowest since the Arab Spring and US shale's position as a swing producer is constrained by a growing focus on ESG and balance sheet along with supply chain bottlenecks in energy equipment and labour.''

BoC in focus

As for money markets, the US Treasury yield curve, as measured by the gap between five and 30-year yields, briefly inverted for the first time since early 2006, raising concerns about the risk of recession. Compared to Canada's curve, this has also flattened as investors weigh the prospects of the Bank of Canada raising interest rates by 50 basis points at its April 13 policy announcement. The 2-year yield touched its best level since October 2008 at 2.427% before dipping to 2.362%. The 10-year pulled back to 2.2 basis points at 2.523%.

Overnight, the BoC's Kozicki spoke on households and monetary policy late on Friday. ''DG Kozicki stated that Bank would be debating the pace and magnitude of tightening ahead of its April announcement and stating that the Bank was prepared to act forcefully,'' analysts at TD Securities explained.

''We don't think this should be seen an explicit hint that the Bank is planning a 50bp hike, but certainly, the remarks had a hawkish tilt to them. The rest of the speech focussed on how monetary policy transmits through households, with Kozicki noting that households are better positioned to weather rising interest rates compared to the 2017-18 cycle.''

Looking forward, with the Federal Reserve expected to raise rates by 50bps in May and June, the Bank of Canada could also be set to move faster. markets are pricing for at least 25bp rate hikes in each of the next seven BoC meetings. This would equate to the BoC reaching a terminal rate of 2.25% in January 2023.

''We continue to see a high bar for 50bp moves, but the risk of more drastic action is clearly rising as inflation continues to surprise to the upside,'' analysts at TD Securities argued. ''We expect the Bank will be closely watching longer-term inflation expectations ahead of the April meeting, and we think the risk of a 50bp hike is highest in June following the expected move from the Fed.''