USD/CAD Offers Better Despite Oil Price Recovery and Missed US Core CPI

  • USD/CAD bulls are accelerating early Asian markets.
  • Oil prices are high, but the CAD struggles against a firm US dollar and new cyclical highs.

At 1.2641, USD/CAD is up 0.13% on the day, little change albeit in recovery mode from its lowest level in nearly four weeks, despite a rally in the oil prices and US data which showed a measure of core inflation climbing less than expected in March. The US Dollar printed a new cycle high in the DXY.

While the initial reading was slightly warmer than analysts expected, with the U.S. Consumer Price Index (CPI) posting the biggest monthly increase in consumer prices in 40 years, the data showed signs that the inflation may have peaked.

Core CPI fell short of estimates, suggesting the Federal Reserve may not need to be as pushy as the market has been expecting. The core CPI, which excludes food and energy prices, rose just 0.3%, below expectations of 0.5% and the smallest increase since September.

However, we saw a reversal in the greenback as US equities tumbled, retracing the relief rally as money markets continue to price in a hawkish Fed. The 10-year US Treasury auction hit a high yield of 2.72% on Tuesday, down from 1.92% the previous month. With inflation expectations remaining relatively stable, if the 10-year yield continues to rise beyond the highs of 2.836% set this week, it will be on track to test the October 2018 high near 3.26. %.

That leaves the upside bias for the greenback, and Fed officials should remain hawkish. A 50bp rise next month is expected to potentially keep the US Dollar on track for the March 2020 high near 103 as measured by the DXY. It has already printed a new cycle high on the day at 100.333.

Meanwhile, Canada’s central bank is expected to raise interest rates by half a percentage point on Wednesday, its first hike of this magnitude since May 2020. It could also start trimming its bloated balance sheet, which would likely support the CAD, especially in the face of the recovery in oil prices.

As one of Canada’s top exports, the price of crude oil rose 6.7% to $100.60 a barrel as Russian oil production fell to its lowest level in 2020. OPEC said also warned that it would be impossible to replace potential supply losses from Russia. Additionally, Shanghai has started to ease mobility restrictions, which should continue to provide relief to the price of oil.