• The Bank of Canada is expected to raise its key rate on Wednesday before the Fed.
• WTI sets three consecutive highs in seven years.
• Canadian core inflation in December was much stronger than expected.
• FXStreet Forecast Poll reflects uncertainty over US rate policy.

The Bank of Canada will make the first move on interest rates at its Wednesday meeting, but the impact on the Canadian dollar will have to wait for the Federal Reserve’s entry into the policy contest later in the afternoon. .

Governor Tiff Macklem’s expected 0.25% rate hike, under Canadian rules which he makes the final decision, would make him the first major central bank to end the political accommodation that became universal with the pandemic in March 2020.

Bank of Canada base rate

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Fed Chairman Jerome Powell and his fellow governors are expected to show their enthusiasm for fighting inflation this afternoon as they address the central bank’s balance sheet which has ballooned to nearly $9 trillion in addition to a decade of excessive quantitative easing dating back to the financial crisis.

Federal Reserve assets

The Fed’s asset mountain will continue to grow for another two months, and markets forecast a 0.25% increase in fed funds at the March 16 meeting, with at least two more hikes expected this year.

There are two possibilities for the Fed to reaffirm its policy initiative. The Federal Open Market Committee (FOMC) could, as the Bank of Canada (BOC) did last October, announce an immediate halt to bond purchases. Alternatively, Chairman Powell could, in his speech or press conference, say that board members were considering an active balance sheet approach, that is, selling assets rather than waiting for them to mature. . No movement is expected and either or both would send Treasury rates and the dollar skyward.

USD/CAD ended the week at 1.2583 little changed from Monday’s open at 1.2558. The pair gained three-quarters of a figure on Friday as support at 1.2500, which had been an effective eight-session low, held.

West Texas Intermediate (WTI) traded above the previous seven-year high at $84.05 for the whole week and closed at $84.65, adding to the strength of the loonie. Oil prices are supported by hopes of a global economic recovery as the Omicron wave passes and, potentially, the threat of a supply shortage, should Russia play a more active role in Ukrainian politics .

Canadian retail sales were slower than expected in November at 0.7% on an estimate of 1.2% and down from 1.5% in October. Annual sales also fell to 4.4% below a consensus forecast of 4.9%. Inflation in December was 4.8% yr, as expected, but the BOC base rate came in at 4% on a forecast of 3.5% and a November pace of 3.6% . Although a rate hike has been widely expected for some time, Wednesday saw the lowest close of the week and USD/CAD is trading at 1.2502 and 1.2451.

The U.S. homebuilding sector continued to perform in December with housing starts up 1.4% to a nine-month high, but backlogs hit a record high, tensions over labor supply and shortages have limited projects. Building permits jumped 9.1%, the biggest increase since January. Sales of existing homes, which make up 90% of the US market, fell 4.6% in December as availability fell 14.2% from a year earlier. The median sale price was 15.8% higher than December 2020. Initial jobless claims were 286,000 for the week of January 14, well above the previous 231,000 and the third consecutive increase. Unemployment filings rose by 200,000 on Dec. 24 and while historically low, the increases may indicate the Omicron wave of the virus has forced layoffs.

USD/CAD Outlook

The twin central bank events on Wednesday will keep USD/CAD and the currency markets in general calm until the verdicts are delivered. The BOC is unlikely to deliver fireworks, although Mr Macklem may be more adamant in his rhetoric on inflation than expected.

Mr. Powell and the Fed have different perspectives. While the end of the bond program is unexpected, it is not far-fetched and the balance sheet discussion could easily encompass a sell-off role in addition to the scheduled run-off starting in March or shortly thereafter.

US producer prices continued to accelerate. The core producer price index (PPI) of 8.3% in December, compared to 7.9% previously and itself revised from 7.7%, was a surprise. The Fed has no shortage of reasons to step up its anti-inflation campaign, even though the apparent defeat of President Biden’s spending bill, Build Back Better, could prevent fiscal pressure on prices from worsening.

There are no Canadian statistics in the coming week.

In the United States, durable goods orders for December should confirm the weakness in retail sales. On Thursday, annualized U.S. fourth-quarter gross domestic product (GDP) is expected to be 5.8%, down from 2.3% previously. Any variation from forecast, up or down, and by degree, will have a direct impact on USD/JPY and Treasury returns.

If the Fed adopts a more aggressive policy stance, USD/CAD will rise, reflecting higher Treasury rates. If Mr. Powell Fed stalls on the balance sheet, the pressure on USD/CAD will increase significantly and 1.2500 will be difficult to defend.

USD/CAD is biased and neutral until bank meetings and Fed contingent.

Statistics Canada January 17 to January 21

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US statistics from January 17 to January 21

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Statistics Canada January 24 to January 28

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US statistics from January 24 to January 28

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USD/CAD Technical Outlook

Friday’s rebound from 1.2500 led to a slight reversal in the Moving Average Convergence Divergence (MACD) and Relative Strength Index (RSI). Both remain in negative territory, but Friday’s MACD has the smallest divergence so far this year and the RSI hit its highest level since early January. It wouldn’t take much of a further rise in USD/CAD for the MACD price line to cross the signal nor for the RSI to break above 50. Given the continued support at 1.2500, a reversal of the MACD would be a buy signal. Volatility in the Average True Range (ATR) flattened on Wednesday after declining from January 11, although Friday’s run did not restore a positive slope.

The 200-day moving average (MA) at 1.2502 reinforces strong support at 1.2500 and is a major reason for its resilience. The 21-day MA at 1.2651 joins resistance at 1.2650 and the 50-day MA at 1.2705 does the same at 1.2700. Tuesday’s crossover of the 50-dma by the 21-dma was more an acknowledgment of USD/CAD’s decline since mid-December than a predictor.

Resistance: 1.2600, 1.2650, 1.2700, 1.2760

Support: 1.2550, 1.2500, 1.2440, 1.2400, 1.2350

FXStreet Forecast Survey

The FXStreet forecast poll reflects the robust support at 1.2500 and the absence of a strong fundamental trend.