USD/CAD better bid despite oil price recovery and core US CPI miss

• USD/CAD bulls stepping on the gas into early Asian markets. 
• Oil prices are elevated and yet the CAD struggles in the face of a firm US dollar and fresh cycle highs. 

At 1.2641, USD/CAD is up 0.13% on the day, little changed although in recovery mode from its weakest level in nearly four weeks. This is despite a rally in the price of oil and US data that showed a measure of underlying inflation climbing less than expected in March. The US dollar has printed a fresh cycle high in the DXY. 

While the initial readout came in slightly hotter than analysts expected, with the US Consumer Price Index (CPI) posting the biggest monthly rise in consumer prices in 40 years, the data showed some signs that inflation may have peaked.

Core CPI fell short of estimates, suggesting that the Federal Reserve might not need to be in such a hurry that the market has been pricing for. Core CPI, which excludes food and energy prices, moved up by just 0.3%, which was below the 0.5% expectations and the smallest increase since September. 

However, we saw a turnaround in the greenback as US stocks sank, retracing the relief rally as money markets continue to price in a hawkish Fed. The US Treasury's 10-year auction hit a high yield of 2.72% on Tuesday, up from the 1.92% high in the previous month. With inflation expectations remaining fairly steady, if the 10-year yield continues higher beyond the 2.836% highs set this week, it will on track to test the October 2018 high near 3.26%.

This leaves the bias to the upside for the greenback and Fed officials are likely to remain hawkish. The expectations are for a 50 bp hike next month will potentially keep the US dollar on track for the March 2020 high near 103 as measured by the DXY. It has already printed a fresh cycle high on the day at 100.333. 

Meanwhile, Canada's central bank is expected to raise interest rates by a half-percentage point on Wednesday, its first hike of that magnitude since May 2020. It could also start to shrink its bloated balance sheet which would likely support the CAD, especially in the face of recovering oil prices. 

The price of crude oil, being one of Canada's major exports, settled up 6.7% at $100.60 a barrel as Russian oil production fell to 2020 lows. OPEC also warned it would be impossible to replace potential supply losses from Russia. Additionally, Shanghai begins to ease mobility restrictions which are likely to continue giving relief to the price of oil.