USD/CAD subdued just above 200DMA at 1.2500 as higher oil prices, hawkish BoC bets insulate loonie from buoyant buck

• USD/CAD has pulled back from over-1.2550 highs to trade back just above its 200DMA at 1.2500 again.
• Crude oil upside and hawkish BoC bets has largely insulated CAD from the US dollar’s advances on Tuesday.

USD/CAD has had a subdued session on Tuesday, with the pair having dropped back to trading just above its 200-day moving average at the 1.2500 level after briefly surpassing the 1.2550 mark midway through US trade. Surging crude oil prices that saw front-month WTI futures hit multi-year highs near the $86.00 per barrel level continued to provide the loonie with tailwinds, as has so often been the case in recent weeks (WTI is up nearly $20 from its December 20 lows). But this wasn’t enough to push USD/CAD below support in the 1.2500 area, with the pair supported by a broad recovery in the US dollar as US government bond yields advanced to reflect new hawkish Fed tightening bets ahead of next week’s meeting.

The net result is that USD/CAD looks set to end the session broadly flat, with both CAD and USD amongst the best G10 performers on the day, with the latter having shrugged off a disappointing NY Fed manufacturing survey for January. The loonie also shrugged off downbeat data in the form of underwhelming Housing Starts figures for December (which came in at 236.1K versus 270K forecasts). That’s likely because CAD continues to derive support from Monday’s bullish (though admittedly out-of-date given its compilation was pre-Omicron) BoC Business Outlook Survey (BOS), the headline index of which hit a new record high.

In wake of the BOS, CAD short-term interest rate markets are now pricing in a 70% chance that the BoC hikes rates at next week’s meeting. Given the BoC hasn’t even yet signalled a willingness to hike rates in Q1 2022, let alone the first month of 2022, that might be a bit of a stretch. At the very least, if the central bank doesn’t hike next week, it will likely signal a willingness to do so in the March meeting to keep pace with the Fed. Wednesday’s Canadian Consumer Price Inflation data (for December) will be viewed in the context of how it affects money market pricing for a rate hike in January and is the next key event to watch for USD/CAD traders.

An upside surprise could push USD/CAD below the big 1.2500 figure and on towards a test of recent lows in the 1.2450 area. A surprise January rate hike coupled with further crude oil markets gains (many commodity strategists see Brent hitting $100 later in the year amid a tighter than forecast market) could combine to send the pair back towards a test of last Q4 2021 lows in the 1.2300 area.