USD/CAD eases back to 1.2600 level as risk appetite, stronger oil prices support loonie post-BoC rate hold

• USD/CAD has slipped back to 1.2600 recently despite the BoC holding rates, as risk appetite/strong oil prices support CAD.
• BoC Governor Macklem’s press conference remarks didn’t move the loonie and attention is now on the upcoming Fed meeting.

After its initial post-BoC rate hold pop as high as the 1.2640s, USD/CAD has dropped back to the 1.2600 level and is back to trading lower by about 0.2% on the session. Whilst a minority of market participants/analysts had been expecting the central bank to hike interest rates by 25bps to 0.50% on Wednesday, explaining the initial post-policy announcement weakness, the loonie has remained underpinned by positive risk appetite and higher crude oil prices. The S&P 500 is currently trading about 1.5% higher on the day and is now trading in the green on the week, facilitating outperformance amongst the more risk-sensitive G10 currencies such as CAD. Meanwhile, WTI has surged nearly $2.0 and is only a whisker away from last week’s multi-year highs, supported by ongoing geopolitical (Russia/Ukraine/NATO) and OPEC+ supply concerns.

BoC Governor Tiff Macklem’s remarks in the post-meeting press conference did not seem to rock the boat much for the loonie. The governor explained the reason for holding off on a rate hike on Wednesday (Omicron weighing on the economy) and alluded to the need to raise interest rates and begin reducing the size of the balance sheet in the months ahead. Somewhat dovishly, he did emphasise that the rate hike path would not be automatic, with each hike to be taken on a meeting-by-meeting basis, and alluded to the possibility of a mid-hiking cycling pause if needed. But this doesn’t seem to have impacted longer-term expectations for the BoC rate path much.

With USD/CAD’s top on Wednesday confirming a downtrend from Monday’s highs, technicians may see the pair as having entered a short-term bearish trend. The bears may now be targetting a move back towards the 200-day moving average at 1.2500 and test of recent lows in the 1.2450 area. Should risk appetite continue to improve and crude oil prices continue to advance, USD/CAD’s short-term path should be downwards. One key event to watch on Wednesday is of course the upcoming Fed policy announcement; like the BoC, the Fed is expected to tee up rate hikes and QT in the coming months. FX markets could be volatile, having ignored US trade data earlier in the session that showed a larger than anticipated, monthly goods trade deficit in December of over $100B for the first time.