USD/CAD chops either side of 1.2700, set to end the week about 0.9% lower

• USD/CAD has swung either side of the 1.2700 level and currently trades around 1.2720, rouhgly flat on the day.
• The loonie was one of the underperforming G10 currencies on the day, the reasoning for which wasn’t clear.

Despite slightly higher crude oil prices on the day and the recent hawkish tone to remarks from BoC Deputy Governor Gravelle on Thursday, the loonie was one of the underperforming G10 currencies on Friday. USD/CAD spent the day undulating either side of the 1.2700 level, falling to lows of the day in line with the 21-day moving average at 1.2680 following not as hot as feared US inflation data, before then rebounding as high as the 1.2740 mark later in the session. At present, the pair is trading roughly flat in the 1.2720 area. On the week, however, the pair looks on course to post a loss of about 0.9%.

As to what drove, CAD underperformance, it's not entirely clear. Technical factors could be at play following the bounce from the 21DMA. Some have cited the BoC’s comparatively dovish stance versus the Fed when it comes to 1) seeing Omicron as a risk worth tweaking the policy path for and 2) with regards to the characterisation of inflation. For reference, while the reference to inflation as transitory was removed from the BoC’s latest statement on monetary policy, this isn't as aggressive as the Fed’s outright stance that the word transitory should be completely retired.

In terms of what's next for the USD/CAD, the pair is roughly at the mid-point between last week’s highs at 1.2850 and this week’s lows close to 1.2600. The focus next week will be on the US dollar side of the equation with the main event of the week being the FOMC meeting. Should the bank surprise with a more hawkish tone than expected on QE taper, inflation or rate hikes, USD/CAD’s risks would lay to the upside rather than the downside, even crude oil markets and risk appetite continue to recover from the recent Omicron-related knock.