USD/CAD bulls lurking at key support in 1.3580s

• USD/CAD is holding at support as the focus remains on the Fed.
•  Bank of Canada expectations are little changed and bias remains bullish fundamentally.

USD/CAD is flat at the end of the week in Asia so far with the price holding around 1.3580, perched below the highs of the day so far at 1.3601.

The US Dollar strengthened on Thursday after Unemployment Claims pointed to a still-strong US labour market. As a consequence, the yield on two-year Treasury notes which are sensitive to interest rate expectations, spiked to levels last seen in July 2007. Futures edged higher, with the market pricing a peak rate climbing to 5.493% in the fed funds by September, before easing a bit later in the session to 5.447%. 

The focus is on the Federal Reserve and Atlanta Fed President Raphael Bostic said on Thursday that they are ready to keep lifting rates higher if inflation doesn't slow and was still mulling how recent, stronger-than-anticipated inflation data might shape Fed policy. The impact of higher rates on the economy may only begin to "bite" in earnest this spring, an argument for the Fed to stick with "steady" quarter-point rate increases, Bostic said.

Meanwhile domestically, economic data in Canada has shown that growth was flat SAAR vs. 1.6% expected and a revised 2.3% (was 2.9%) in Q3 and was the weakest since Q2 2021. For December alone, GDP fell -0.1% MoM vs. 0.1% expected and this dragged the y/y rate down to 2.3% vs. 2.8% in November. Bank of Canada expectations are little changed. No change is expected at the next meeting March 8 but WIRP suggests a final 25 bp hike to 4.75% is still priced in for Q3. The BoC has signaled a pause in its hiking cycle and against this backdrop, the loonie is likely to could continue to struggle to regain significant ground against the USD.