USD/CAD bears lurking around prospects of hawkish BoC 2022

• USD/CAD stabilises the offer near 1.2790 as markets consolidate the volatility. 
• The BoC is tipped for a more aggressive approach given the tight labour market and sky-high inflation. 

USD/CAD is lower on the day but is stalling the decline in the New York session finding a bottom near 1.2763 after sliding from the day's high of around 1.2857. The bulls are stepping in although the greenback is better offered across the board as per the DXY index. At the time of writing, USD/CAD is trading 0.35% lower at 1.2787.

The greenback has been sliding in the middle of the month in what tends to be irregular market flows considering the holiday period. This might go some way to explaining why the US dollar was so heavily offered following what was a strongly hawkish outcome of the Federal Reserve. The DXY index, which measures the greenback vs a basket of major currencies, including the Canadian dollar, has been unable to cross the 97 figure and has since fallen to as low as 95.85. The weakness in the greenback is welcomed by the commodity complex and high beta currencies, breeding life into USD/CAD's downside of late.

Focus turns to the BoC

On the domestic front, earlier this week, the headline Consumer Price Index held at 4.7% YoY in November, in line with the market consensus. This is its highest level in 30-year high including 2 decimals. Core inflation saw a slight pickup, with the average of the Bank of Canada's measures edging higher to 2.73% YoY from 2.67% in October. ''This is unlikely to faze the BoC however given the stable headline print which leaves inflation tracking near MPR projections for 4.8% in Q4,'' analysts at TD Securities argued.

In other events, governor Tiff Macklem discussed the Bank of Canada's mandate renewal in his final speech of 2021 and provided more insight into the mandate renewal process. ''However'', analysts at TD Securities argued, ''the BoC's new mandate is unlikely to have any impact on policy in the near-term; as discussed on Monday, the Bank's assessment of maximum sustainable employment should not delay liftoff with inflation well above the target range, although it does raise the bar for hikes once inflation moderates (ie. 2023).''

The convergence of the Fed and BoC would be expected to keep the pair contained within familiar ranges, especially when taking into account the most recent LFS data that indicated a strong labour market being essentially at full employment. This would be expected to see wages push inflation even higher in the coming months as workers appear to have the bargaining power to demand higher compensation. 

''Given this backdrop, the central bank appears to be late in its normalization of monetary policy,'' analysts at the National Bank of Canada said in a note at the start of the week. ''We expect five rate hikes next year with the kick-off occurring in March. Of course, this assumes that Omicron does not substantially undermine confidence and leads to more stringent health restrictions.