USD/CAD bulls are in town taking on the 1.3450s

• USD/CAD is firm in early Asia near 1.3450 as the US Dollar hardens. 
• Fed sentiment is driving US yields and the US Dollar up. 

USD/CAD rallied to a one-week high on Wednesday as US bond yields rose and domestic data showed housing starts fell more than expected in March. At the time of writing, USD/CAD is trading around 1.3455 in early Asia. 

Mortgage applications in the US fell sharply in the week to 14 April. The MBA measure fell 8.8% WoW as higher interest rates impact demand, particularly from first-time homebuyers, analysts at ANZ Bank explained. Additionally, the oil price settled 2.1% lower at $79.16 a barrel as the US Dollar bounced back against a basket of major currencies.

The US Dollar index, DXY, which tracks the currency against a basket of its peers, was up 0.206% as markets turn more skeptical that the Federal Reserve will cut rates later this year. It currently sits at 101.90 and has moved between a low of 101.656 and 102.228. Meanwhile, the yield on two-year Treasury notes were hitting a one-month high of 4.286%.

In this regard, the futures pricing has show an 85.7% chance the Fed will hike rates 25 basis points when policymakers conclude a two-day meeting on May 3, according to CME's FedWatch Tool. However, the US dollar is getting a boost on hawkish themes coming through again. Federal Reserve´s Governor Christopher Waller said that despite a year of aggressive rate increases, the Fed "hasn't made much progress" in returning inflation to their 2% target and argued that rates still need to go up. As such, the likelihood of a rate cut by December has narrowed considerably this week. 

Looking ahead, the Federal Open Market Committee will enter a blackout this weekend ahead of the 2/3 May meeting. The latest guidance is very much in line with market pricing and Atlanta Fed President Bostic said that he favors one more 25bp rate hike and then a pause. Bostic explained that tightening in credit conditions could do some of the Fed’s work. ´´The Atlanta Fed has historically been seen, rightly or wrongly, as a barometer of consensus on the FOMC,´´ analysts at ANZ Bank said.

Domestically, Canadian Housing Starts for March dropped 11% contributing to a slower trend in recent months that follows a rapid increase in borrowing costs. Also, Canadian producer prices rose by 0.1% in March from February.

´´A lower Canadian dollar, especially against the greenback, has sparked fears that import prices will rise—lighting up inflation just as it’s finally settling down,´´ Assistant Chief Economist, Royal Bank of Canada wrote.

´´But with domestic services dominating more of what we buy and Canada importing more from countries outside the US, these currency fluctuations matter less to prices than they once did,´´ he added and continued:

´´A weak CAD won’t derail inflation trends that are now heading in the right direction. In an increasingly services-dominant economy, demand, not currency, will decide where prices go.´´