Canadian dollar climbs despite high US inflation
The Canadian dollar continues to flex its muscles, as USD/CAD has dropped to an 8-week low. The pair is pressing very close to the 1.25 line, which has psychological significance.
With everybody talking about inflation, including Fed Chair Jerome Powell, today’s US CPI report for December could well have been the highlight of the week. Only there were no surprises in either direction, as the headline reading of 7.0% y/y matched the consensus, while the core reading of 5.5% was marginally above the forecast. One could be forgiven for getting alarmed at an inflation clip of 7%, but investors didn’t let the heady release get in the way of their optimistic mood, perhaps because they feared even higher inflation numbers.
The markets were also soothed by Powell’s masterful performance on Tuesday, as he assured lawmakers that the Fed wouldn’t hesitate to use the rate hike ammunition if needed against the nasty inflation enemy. The markets have heavily priced in three rate hikes over the course of the year, and the burning question for the markets is whether the Fed will raise rates four times in 2022 and whether lift-off will occur in March.
In the meantime, risk sentiment remains elevated and the US dollar is under pressure despite a more hawkish Fed and looming rate hikes. This has boosted the Canadian dollar, which has climbed 1.07% so far this week. Higher oil prices and the possibility that the Bank of Canada will follow the Fed and tighten policy are also contributing to the Canadian dollar’s upswing. The US dollar is under pressure, but I wouldn’t be surprised to see it rebound in the near term, as 7% inflation, which is a 40-year high, could help provide a floor for the US dollar.
- USD/CAD faces resistance at 1.2762. Above, there is resistance at 1.2879
- There are support levels at 1.2579 and 1.2513
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