USD/CAD rallies and refreshes two-year highs, despite hot inflation in Canada, ahead of FOMC’s decision

• USD/CAD is marching up, bolstered by high US T-bond yields underpinning the greenback.
• Canada’s CPI rose below forecasts but remains above the 7% threshold.
• US housing data was mixed, though higher mortgage rates would likely continue to deteriorate the housing market.G

The USD/CAD rises to fresh two-year highs, above the 1.3300 mark, invalidating a previous triple-top chart pattern, courtesy of a buoyant US dollar, alongside falling crude oil prices, are a tailwind for the USD/CAD.

The USD/CAD is climbing sharply after hitting a daily low at around 1.3226, also spurred by the advancement of US T-bond yields, led by the 10-year benchmark note sitting at 3.563%, on expectations that the Federal Reserve would raise rates by at least 75 bps. At the time of writing, the USD/CAD is trading at 1.3365, above its opening price by 0.83%.

USD/CAD soars above 1.3300 on US dollar strength

Earlier in the North American session, Statistics Canada reported that inflation in the country remains higher but eased a tone, registering figures below estimations. The Consumer Price index (CPI) in August rose 7% YoY, less than estimates of 7.3% and below 7.6% of July’s figure. On the month-over-month numbers, inflation dropped 0.3%, more than a contraction of 0.1%. According to the report, lower gasoline prices and slower gains in shelter are the main reasons for inflation ticking lower.

The so-called core CPI, which excludes volatile items, eased slightly from 5.4% YoY in July to 5.2% in August. Sources cited by Reuters said, “today’s numbers reinforce our view that the Bank of Canada might only have one 50-bp rate hike left, whereas the Fed could very well continue raising rates for longer and to higher levels.”

Elsewhere, the US economic docket featured August’s Housing Starts and Building Permits. The former unexpectedly rose above forecasts while the latter flashed signs of higher mortgage rates, decelerating to its slowest pace in two years.

Meanwhile, the US Dollar Index, a gauge of the greenback’s value against six peers, is rising 0.57%, up at 110.215, while the US 10-year bond yield edges up eight bps, at 3.571%, a tailwind for the USD/CAD.

What to watch

An absent Canadian docket would leave USD/CAD traders leaning on the buck’s dynamics. On the US economic calendar, US Existing Home Sales, the Fed’s decision, and Jerome Powell’s press conference would shed some light regarding the path of the US central bank.

USD/CAD Key Technical Levels