Canadian dollar edges higher

The Canadian dollar has posted slight gains on Wednesday. There are no Canadian tier-1 events on the calendar this week, so we can expect US releases will have a magnified impact on the movement of the Canadian dollar this week.

With the Fed poised to launch a series of rate hikes starting in March and inflation surging in Canada, it’s unlikely that the Bank of Canada will simply fold its hands. BoC Governor Tiff Macklem said as much when speaking to a Senate committee in Ottawa last week. Macklem said that additional interest rates are needed to lower inflation to the 2% target, with the number of hikes depending on economic developments. And after that? There hasn’t been much guidance from the BoC, leaving the markets in the dark. Although Macklem was clear that additional rate hikes are on the way, his comments indicated that he still views inflation as transitory, saying that he expects inflation to ease in the second half of 2022. Macklem is speaking to the Canadian Chamber of Commerce today and any hints about rate moves could wake up the sleepy Canadian dollar.

In the US, the markets have priced in at least five rate hikes this year, but the Fed is still more dovish. Earlier in the day, Fed member Bostic said that he saw inflation easing shortly and said he expects 3-4 rate hikes this year. Bostic’s remarks boosted risk appetite, as concerns that the Fed will tighten aggressively have eased.

US inflation continues to rise and the markets are bracing for an acceleration in January CPI. The consensus stands at 7.3%, which would be up from 7.0% in December. If inflation is within expectations or higher, the likelihood of a 50-basis point hike in March will increase. According to CME’s FedWatch, the markets have priced in a 75% chance of a 25-bps rise and a 25% chance of a 50-bps hike at the March meeting.

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USD/CAD Technical

• USD/CAD faces resistance at 1.2818 and 1.2873
•  1.2679 is being tested in support for a second straight day. Below, there is support at 1.2595

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