USD/CAD falls back from multi-month highs despite hot US CPI, now under 1.2950 as crude oil prices rise

• USD/CAD has been choppy in wake of US CPI, but has ultimately fallen back below 1.2950 as crude prices rise.
• However, the sour tone to trade in US equities hampers the prospect for a broader loonie rebound.
• USD/CAD hit its highest level since November 2021 on Tuesday in the mid-1.30s.

USD/CAD saw a momentary jump higher in recent trade in wake of hotter than forecast US Consumer Price Inflation data and came close to testing Tuesday’s multi-month highs in the mid-1.3000s. However, almost as quickly as the pair rose, it has reversed lower again and recently fell back to the 1.2950, where it trades with on the day losses of about 0.5%.

Global crude oil prices have regained their poise after dipping earlier in the week and this is helping the loonie to recover from its weakest levels against the US dollar since November 2021. But the downbeat tone to US (and global) equity markets presents a barrier to USD/CAD trading any lower or testing support in the 1.2900 area.

US equities, with which the risk-sensitive loonie has been closely correlated (as has also been the case with other risky currencies) in recent weeks, are under pressure once again on Wednesday as investors fret about what the latest US inflation figures mean for the Fed policy outlook. Investors are concerned about the Fed tightening aggressively this year and next to stymie still elevated inflation despite a weakening global growth outlook.

Even though the BoC is arguably even more hawkish than the Fed, this hasn’t been enough to shield the risk-sensitive loonie from the impact of the downturn in risk appetite in recent weeks. The BoC will be in focus later this week when its Deputy Governor Toni Gravelle speaks on the topic of commodities, growth and inflation on Thursday. Traders will listen closely, as he could offer further hints about the outlook for interest rates.