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USD / CAD Reverses From a Multi-Day High As Oil Bears Take a Respite And Focus On The Fed And Geopolitics
USD / CAD accepts bids to reestablish the intraday low and reverse a two-day uptrend at the seven-week high. Fresh geopolitical concerns and cautious optimism allow the oil price to recover. While China-Russia relations heighten geopolitical concerns, Fed signals remain in favor of higher rates. Traders can be entertained by secondary US data, but Japan is absent, and a decline in yields may permit further consolidation of gains.
As it reverses from a seven-week high marked the day before on Thursday morning, USD / CAD accepts offers to re-establish the intraday low near 1.3540. In doing so, the Loonie pair records its first daily loss in three days amid market consolidation and cautious optimism.
However, the absence of Japanese traders due to the Tokyo holiday has joined the previous decline in US Treasury bond yields and a decline in US inflation expectations to impact on the most recent USD / CAD exchange rate. The 10-year and 5-year breakeven inflation rates from the St. Louis Federal Reserve (FRED), however, indicate a decline in US inflation expectations by retreating from the multi-day high.
On the same trajectory could be a reversal in Canada's primary export commodity, namely WTI crude oil. After losing nearly 3.0% the previous day as a result of weak US inventories and a strong US Dollar, the black gold fell to a 13-day low. Nevertheless, as of press time, the energy benchmark has posted modest gains and is currently trading around $74.00.
Despite the recent market consolidation, USD/CAD purchasers remain optimistic due to hawkish Federal Reserve (Fed) concerns and geopolitical concerns.
In terms of geopolitics, US President Joe Biden believes that his Russian counterpart is incapable of using nuclear weapons by abandoning an international treaty. However, the fears surrounding the Ukraine-Russia conflict are far from dissipating, with the most recent round of negotiations between the West and China exacerbating the situation. The Wall Street Journal (WSJ) reported recently that the United States is contemplating releasing intelligence on China's potential arms transfer to Russia. Previously, China-Russia relations appeared to have exacerbated geopolitical tensions, as the United States firmly criticized such moves and favored a rush towards risk aversion, which favored the US Dollar.
In another section, the most recent Federal Open Market Committee (FOMC) Monetary Policy Meeting Minutes stated that all participants concurred that additional rate hikes are required to achieve the inflation target, while also favoring further Fed balance sheet reductions. According to Reuters, St. Louis Federal Reserve President James Bullard also stated that the Fed will need to raise interest rates above 5% to combat inflation. The policymaker also stated that he believes there are high chances they could beat inflation this year without causing a recession. In addition, John Williams, president of the Federal Reserve Bank of New York, emphasized the concerns supporting the Fed's higher interest rates by stating, per Reuters, "Fed is absolutely committed to getting inflation back to 2%."
US Treasury bond yields remain inactive after retreating from a multi-day high, while Wall Street closed neutral and the S&P 500 Futures remain modestly bid as of late.
In the near future, the second estimates of the US Personal Consumption Expenditures (PCE) data for the fourth quarter (Q4), as well as the preliminary readings of the US Q4 Gross Domestic Product (GDP), will be crucial for providing USD / CAD traders with new information.
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