Canadian dollar breaks below 1.25

Canadian dollar climbs despite high US inflation

The Canadian dollar has extended its gains for a third consecutive day. USD/CAD has dropped 0.15% on the day, enough to push the pair below the 1.25 level, which has psychological significance, for the first time since mid-November.

It has been an excellent week for the Canadian dollar, which has gained 1.27%. These strong gains are more a case of greenback weakness rather than loonie strength, as the US dollar has retreated broadly against the major currencies this week. Investors continue to be in risk-on mode, shrugging off a soft nonfarm payrolls report and a sizzling CPI reading of 7.0% y/y. One could make a cogent argument that investors will not sit idly with arms folded if inflation continues to climb, and risk appetite could dissipate and send the US dollar higher. In the meantime, the markets are buying what Jerome Powell is selling, which is that inflation should ease during the year, but the Fed stands ready to raise rates as much as needed to curb inflation.

Powell’s testimony before Congress earlier this week soothed the markets and kept risk sentiment intact, even though the Fed has taken a hawkish pivot as it moves towards policy normalization. The Fed has doubled its tapering and will wrap up its bond purchase programme in March before embarking on a series of rate hikes. There is a strong likelihood that the Fed could begin hiking in March and there is talk of up to four rate hikes in 2022. The Fed is on the verge of tightening policy and time will tell if risk sentiment remains strong or will a hawkish Fed boost the US dollar.

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USD/CAD Technical

• • 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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