USD/CAD prints fresh seven-week highs above 1.2600 as oil prices fall

• USD/CAD hit seven-week highs above 1.2610 in recent trade, though his since slipped back a few pips.
• The loonie is suffering from a drop in oil prices, with rising Canadian inflation failing to come to its aid.

USD/CAD hit fresh seven-week highs at 1.2610 on Wednesday, marginally eclipsing last week’s high 1.2604 high. The pair has since dropped back from session extremes a little. Crude oil markets have been under pressure in recent hours, with WTI and Brent both now down by more than $2.0 on the day each and this has been weighing on the oil price-sensitive loonie. Technicians appeared to see an earlier dip back towards the 50-day moving average in the 1.2530s as a buying opportunity. If the pair can break cleanly above 1.2600, then technicians may target resistance at 1.2650, the 6 October high.

CAD’s losses of about 0.25% on the day versus the US dollar make it the second-worst performing G10 currency on the day. Only the Aussie, down about 0.5% on the day versus the buck, is fairing worse. The loonie is underperforming despite the latest Canadian Consumer Price Inflation report confirming that price pressures increased in October earlier in the session. For reference, the headline rate of CPI rose to its highest level since 2003 at 4.7%, up from 4.4% in September. That was in line with median economist expectations, but the negative CAD reaction today suggests that market participants might have been expecting a positive surprise, as was seen in UK inflation data this morning and in the US last week.

In fairness, the Bank of Canada’s core measures of inflation did surprise to the upside. The core measure was up 3.8% YoY, above expectations for a 3.5% rise, while the core measure rose 0.6% MoM, above expectations for a 0.4% jump. Moreover, analysts expect inflation to rise further in the months ahead amid recent disruptions to the port in Vancouver, which has been impacted by deadly flooding and landslides. Analysts at Scotiabank said they see headline inflation surpassing 5.0% by the end of the year. Regarding what all of this means for the BoC, according to Canada-based TD Securities, “this doesn’t change anything” as it was broadly in line with the bank's forecasts.