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Market News USD/CAD reaches a 23-month high above 1.3270 as oil falls and the DXY welcomes the Fed's hawkish tilt

USD/CAD reaches a 23-month high above 1.3270 as oil falls and the DXY welcomes the Fed's hawkish tilt

USD/CAD continues to trade near its best levels since October 2020. As a result of the contrast between the worse US housing data and the weaker Canadian inflation data, investors are avoiding risk and favoring bulls. Yields fluctuate near multi-year highs to bolster USD strength ahead of the Fed. Oil prices are weighed down by apprehensions that aggressive rate increases will reduce demand.

Daniel Rogers
2022-09-21
527

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The USD/CAD climbs above 1.3350 and nears 1.3370 as bulls prepare for the Fed meeting on Wednesday morning. Fears of aggressive Fed rate hikes and declining prices of Canada's primary export commodity, WTI crude oil, pushed the price to its highest levels since October 2020 the day before, bringing it to a multi-day high recently.

 

WTI crude oil refreshes its intraday low near $83.40 as of press time, registering a three-day downturn. "The OPEC+ producer grouping - the Organization of Petroleum Exporting Countries and its affiliates, including Russia - is currently falling a record 3.58 million barrels per day short of its targets, or approximately 3.5 percent of global demand. According to Reuters, "the deficiency shows the underlying tightness of supply in the market, even as fears of a recession pull prices lower."

 

In contrast, the US Dollar Index (DXY) shows slight increases around 110.25 as it approaches the 20-year high established earlier in the month. In doing so, the dollar index against the six major currencies bolsters hawkish Fed wagers and Chinese and Russian anxieties.

 

While a rate hike of 75 basis points (bps) by the Federal Reserve had an 83% likelihood of occurring, recent discussion about a rate hike of 1.0% appeared to favor risk aversion. Tuesday, renowned global economist Nouriel Roubini joined the group of Fed hawks. Reuters reported that the Federal Reserve began a two-day meeting on Tuesday, with rate futures traders pricing in an 83% chance of a 75 basis point raise and a 17% possibility of a 100 basis point tightening.

 

The weak inflation in Canada and mixed US housing data are other factors in the USD/CAD appreciation. In spite of this, Canada's Annual Consumer Price Index (CPI) decreased to 7.0% from 7.3% anticipated and 7.6% previous readings. Alternatively, the number of US Building Permits decreased to 1.517 million in August, compared to the 1.61 million expected and 1.68 million reported previously. However, Housing Starts increased to 1.575 million compared to the market consensus of 1.445 million and previous readings of 1.404 million.

 

On the other hand, according to Reuters, the Asian Development Bank (ADB) lowered its growth predictions for emerging Asia in 2022 and 2023 on Wednesday due to growing risks from heightened central bank monetary tightening, the consequences from the conflict in Ukraine, and COVID-19 lockdowns in China. The news of a sudden shutdown in the steel hub of Tangshan due to China's zero covid policy, which recently challenged market sentiment and bolstered safe-haven demand, has joined the line. In addition, stories indicating that US Senators want secondary penalties on Russian oil look to threaten the market's willingness for risk.

 

S&P 500 Futures nurse their wounds near 3,880 after falling the most in a week the previous day, as US benchmark Treasury bond yields recede from a multi-day high. During the pre-Fed period of apprehension, US 2-year Treasury rates surged to their greatest level in 15 years, while 10-year yields reached their highest level in 11 years.

 

In the future, the focus will be on the Fed's efforts to avert recession while taming inflation, which makes today's economic forecasts and a speech by Fed Chairman Jerome Powell more significant than the interest rate announcement.


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