February 4, 2023

USD/CAD struggles to extend recovery above 1.3380 ahead of BoC policy

  • USD/CAD is facing stiff resistance in surpassing the 1.3380 hurdle as the focus shifts to BoC policy.
  • BoC Governor is expected to hike interest rates further by 25 bps to 4.5%.
  • A sell-off in S&P500 futures is portraying caution in the market mood.

The USD/CAD pair is facing barricades in paddling above the immediate resistance of 1.3380 in the Asian session. The Loonie asset is expected to display a volatility contraction as investors are awaiting the interest rate decision by the Bank of Canada (BoC) for fresh cues. To tame the roaring inflation, BoC Governor Tiff Macklem might continue hiking interest rates further.

Meanwhile, S&P500 futures are facing immense sell-off, portraying that investors are getting risk-averse ahead of the release of the United States Gross Domestic Product (GDP) data. The 500-US stock basket futures have dropped sharply amid a decline in investors’ risk appetite. The US Dollar Index (DXY) is building a cushion around 101.50. The 10-year US Treasury yields have dropped below 3.46%.

According to a poll from Reuters, BoC Governor Tiff Macklem’s aggressive policy-tightening campaign is expected to calm as the street sees a further interest rate hike by 25 basis points (bps) to 4.50%. Also, it states that the Canadian central bank will keep interest rates at 4.5% for the rest of the year, which indicates that this might be the end of further policy tightening. Canada’s headline inflation stood at 6.3% for December and is expected to remain above the 2% inflation target till Q3CY2024.

Oil prices have attempted a recovery after dropping to near $80.00 as US President Joe Biden is considering refilling the Strategic Petroleum Reserve (SPR), which was eased to combat mounting oil prices. This might disturb the equilibrium in the demand-supply mechanism, which might result in short-term pain for oil buyers due to higher prices. It is worth noting that Canada is a leading exporter of oil to the United States and a recovery in oil prices will support the Canadian Dollar.

On the United States front, the release of the GDP data might trigger volatility ahead. According to the consensus, the annualized GDP is seen lower at 2.8% vs. the prior release of 3.2%.

 

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