- USD/CAD was crushed on Wednesday in wake of a dovish Fed and now trades at 1.2400.
- However, amid softer crude oil prices and a cooler than expected Canadian inflation report, the loonie lags some G10 peers.
USD/CAD hit fresh multi-year lows on Wednesday amid a dovish market reaction to the latest FOMC rate decision. The pair is now trading just above the 1.2400 level, having easily broken below support in the form of last week’s 1.2440ish lows. These lows ought now to offer some resistance upon the retracement with bears using any potential such retracement as an opportunity to get short again. At present, the pair trades about 0.3% or 30 pips lower on the day, a decent performance for the loonie though it is lagging other G10 peers including AUD, NZD, EUR and GBP amid some separate bearish factors.
Driving the day
Fed Chair Jerome Powell has wrapped up speaking in wake of what was a typically dovish press conference performance and one where the Fed Chair, as has been the case consistently over the last few weeks, refused to be dragged into talking about any of the more sensitive topics (QE tapering, tweaks to the current QE, the Fed’s view on bond yields etc.). Though FX market volatility has died down over the last hour amid a lack of any new surprises from Powell, the damage has been done to the US dollar, hence why USD/CAD is trading at multi-month lows just above the 1.2400 level.
As a reminder, the US dollar was hit hard in wake of the initial release of the Fed’s monetary policy decision, new statement, updated dot-plot and new economic projections; rates were held as expected, the statement was tweaked to reflect an improvement in the economy over the last few months and also to reflect the improvement to the economic outlook as a result of more fiscal stimulus, something which the big upgrades to the economic forecasts also reflected – all of this was expected, so it was the dot-plot that delivered the dovish blow to USD; the median dot continues to show rates staying at zero through 2023. Markets had been building up expectations that the dot-plot might show a hike in 2023, given that money markets are pricing in a hike as soon as early 2022.
Aside from the Fed, which has been bullish for CAD through the channel of a weaker US dollar, there are few other factors worth talking about today that have been weighing on CAD; firstly, crude oil markets continue to trade with losses amid demand concerns as Europe continues to fumble its vaccine rollout and following news out of the UK that its vaccine rollout will unexpectedly slow at the end of the month (though there are some rumours this may be due to EU export bans, which means the doses would be diverted to Europeans, meaning no net negative effect on crude oil demand). Meanwhile, the February Canadian inflation report showed inflation running softer than expected, though desks still expect inflation to pick up dramatically in the coming months as a result of weak base effect from the first Covid-19 wave in 2020.