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USD/CAD firm ahead of Bank of Canada decision

US crude oil (USOil) extended its losses to $95 per barreldown more than 22% since the peak observed on March 24, following the release of the strategic oil reserves of the United States and its allies and China’s strict pandemic containment measures. Oil prices could still fluctuate in the near term as OPEC will announce the crude oil market report today (precise time TBD) and the EIA and IEA reports are expected to be released tomorrow.

Weak oil prices also affected Canada, one of the main exporters of crude oil, with USDCAD stabilizes and rebounds from a trough in 1.2402 on April 5 and extending its uptrend, posting a gain of more than 1% in five trading days. The former recorded gains against a number of major currencies as markets priced in higher inflation and accelerated monetary tightening by the Federal Reserve. In the fixed income market, the yield on US 10-year bonds reached 2.77% for the first time since March 2019; the 5-year bond yield and the 30-year bond yield also reached the highest levels since late 2018 and May 2019, respectively, closing at 2.77% and 2.81%. Today, the market expects the US CPI to rise at the fastest pace in 30 years, reaching 6.7%.

In addition, risk aversion spurred by uncertainty in Ukraine and rising yields in the US relative to other major countries further boosted dollar strength. This Wednesday (13/4)the Bank of Canada will announce its interest rate decision and quarterly monetary policy report, and Governor Macklem will also hold a press conference one hour after the meeting.

Figure 1: Bank of Canada monetary policy outlook. Source: Reuters poll

Economists expect the central bank to hike rates by 50 basis points to 1.00%, according to a Reuters poll. If so, it would be the first time the Bank of Canada has raised interest rates by 50 basis points since May 2000. Furthermore, the outlook shows that inflation is expected to remain high at 6% in the second quarter of this year, then gradually decline and eventually return to just above 2% in the second quarter of 2023.

Technical analysis

USDCAD

On the daily chart, USDCAD closed above the 1.26 level overnight. The short term resistance is 1.2670who is also the 100 day SMA. If the bulls are successful in breaking through, this will further validate the MACD golden cross signal and continue to test resistance at 1.2740 and 1.2860. If the price is under pressure and closes below the 1.26 level, it means the pair will continue the downtrend seen since early March and further test 1.2480 (FR 50.0%) and 1.2370 (FR 61.8%).