USD/CAD: All eyes on the BoC next week as US dollar reaches for the skies

• Bank of Canada is expected to announce that it is ending its balance sheet reinvestment program.
• USD/CAD presses against daily resistance as the Fed narrative underpins.

USD/CAD is holding in the resistance around 1.2590 that was penetrated but simultaneously hamstrung the pair overnight, pulling the pair back from a full breach into the 1.26 area. The US dollar has reached the highest in two years and the US Treasury 10-year yield touched a three-year high following hawkish signals from the Federal Reserve. In Asia, the greenback has extended those highs. DXY, hit a fresh 99.903 cycle high,  the highest since late May 2020 as it reaches towards blue skies at the psychological 100.00 mark. 

Underpinning the greenback, the 2 year-10 year spread widened also due to the Fed's plans to reduce its balance sheet. The yield on 10-year Treasury notes was higher by 3.8 basis points to 2.647% while the 2-year note yield was losing 4.5 basis points at 2.457%, leaving the 2-10 spread at 18.72 basis points by the close of play on Wall Street.

Meanwhile, the Fed narrative is keeping a lid on rallies in the commodity currencies and the price of oil tanking to the lowest levels since mid-March has not helped the case for CAD. The minute's Fed released yesterday from the Fed's March meeting underpin the worries of higher prices and reinforce the prospect that the US central bank's balance sheet reduction is imminent. On Thursday, St. Louis Fed president James Bullard polished this theme by saying the Fed remains behind the curve despite increases in mortgage rates and government bond yields. 

As for oil, West Texas Intermediate (WTI) crude oil has been pressured this week and it carved out a fresh low on Thursday, reaching a low of  $93.84c after falling from a high of $98.80c. The price of crude oil has fallen for a second straight day on Thursday. Wednesday's announcement of the release of 60-million barrels of strategic reserves from members of the International Energy Agency has weighed on the price at the same time that a drop in Chinese demand due to quarantines hits the market.

BoC in focus

Looking ahead to next week, the Bank of Canada is expected to announce that it is ending its balance sheet reinvestment program at next week's interest rate announcement. ''In practice, we expect the Bank will end its secondary market buybacks by the end of April ($650mn/week on average), but we look for it to continue retaining a small amount of primary market issuance (~7% of nominal auctions),'' analysts at TD Securities said. 

''Roughly a third of the BoC's bond holdings are scheduled to mature by the end of 2023, so we look for the balance sheet to decline relatively quickly through the early phases of QT. However, the Bank has indicated that it doesn't expect to reach pre-pandemic levels of settlement balances, which suggests that CORRA will continue trading below the BoC's target.''