USD/CAD drops amid strong data/hawkish BOS survey, but remains close to 1.2500 level

• USD/CAD is lower, weighed by strong Building Permits data and a BOS survey that supports fast BoC tightening.
• However, the pair continues to trade within recent ranges near 1.2500, as the buck remains broadly buoyant.
• But strategists think that given advancing equities, high commodity prices and a hawkish BoC, USD/CAD can fall towards 1.2400.

Though the latest Business Outlook Survey (BOS), released by the Bank of Canada once per quarter, was broadly interpreted as supporting the case for a faster pace of rate hikes from the BoC in the quarters ahead, its impact on the loonie was limited. USD/CAD was last trading down about 0.2%, but continues to respect recent ranges and remains close to the 1.2500 level that has been acting as a magnet for the past week or so. For reference, the headline BOS indicator dipped back from Q4 2021’s record highs reading of 5.9 to 4.98 in Q1 2022, leaving it still well above pre-pandemic levels.

The general takeaway from the release was that Canadian firms continue to face elevated inflationary pressures and continue to face struggles in hiring/retaining workers, who are demanding higher pay. The BOS survey was conducted before Russia's invasion of Ukraine and a special survey that was conducted in March showed that about half of firms said they expected to impacted by the war, mostly through higher commodity prices.

Elsewhere, strong Canadian Building Permits figures were also supportive to the loonie, after the headline figure recorded a 21% MoM leap in February versus January to hit a record one-month high. But the US dollar has also performed quite well on Monday as tensions on the Russo-Ukraine front rise and this is, for now preventing USD/CAD from breaking lower towards last week’s multi-month lows in the 1.2430 area.

Russian forces stand accused of committing war crimes in Ukraine after evidence emerged of mass civilian killings in the north post-Russia’s withdrawal and European currencies have been underperforming on the chatter of tougher sanctions. But the loonie has in recent weeks been immune to geopolitical-related risk-off given its positive exposure to higher commodity prices, which are now seen as “structurally higher” in wake of the Russo-Ukraine war.

WTI remains well supported to the north of the $100 per barrel mark and global equities have been advancing, which is a cocktail for a lower USD/CAD. If the BoC can maintain its lead over the Fed in terms of monetary tightening (a 50bps move is very much expected at the bank’s next meeting), the pair stands a good chance at pushing to fresh annual lows under 1.2400 and on towards 2021 lows at 1.2300.