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Crude Rallies, Macklem Hawkish, But CAD/USD Weakens As Fed Hawks Have their Day

Forex Oct 06, 2022 14:01
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By Ketki Saxena

Investing.com -- Despite the rally in oil prices, the commodity-linked Canadian dollar weakened against its US counterpart today as worries that the Federal Reserve will persist on its aggressive rate-hike cycle dominated markets, also pressuring equities. 

Minneapolis Fed President Neel Kashkari added his voice today to numerous Fed policymakers yesterday who pushed back against the idea of a dovish pivot from the US Central Bank. Kashkari said the U.S. central bank is "quite a ways away" from being able to pause its aggressive interest-rate hikes. Yesterday, Fed policymakers including Atlanta’s Fed Bostic and San Francisco Fed Daly said rates would need to be hiked for longer, brushing away the possibility of rate cuts in 2023.

FX Sreet notes, “The recent hawkish comments by several Fed officials reaffirmed expectations that the US central bank will tighten its monetary policy at a faster pace to tame inflation. In fact, the markets have been pricing in another supersized 75 bps Fed rate hike move in November. This, in turn, remains supportive of elevated US Treasury bond yields, which, along with a weaker risk tone, continues to act as a tailwind for the safe-haven greenback.”

U.S. Treasury yields, along with Canadian treasuries were higher across as the curve. 

US economic data included higher-than-expected Initial Jobless claims, rising to 219K, higher than estimates of 203K, although the 4-week average persisted unchanged at 206.5K. Rate hike bets and labour market expectations also continued to be supported by yesterday’s stronger-than-expected ADP (NASDAQ:ADP) job figures.

Looking forward, George Davis, chief technical strategist at RBC (TSX:RY) Capital Markets believes that "CAD will still face some challenges heading into year-end and early 2023, as BoC rate hikes are expected to result in a mild recession in Q2 and Q3 2023”. 

In a speech today, Bank of Canada Governor Tiff Macklem reiterated: "We've been pretty clear that interest rates need to continue to move up”. Mr. Macklem doubled down on the need to tame inflation, noting “The longer high inflation persists and the more pervasive it becomes, the greater the risk that high inflation becomes entrenched”. 

The Bank of Canada’s hawkishness however provides little upside to the Canadian dollar against the USD, with money markets betting the Fed will end its tightening cycle with a higher policy rate than the BoC, and maintain that higher rate for longer. 

Christian Lawrence, senior cross-asset strategist at Rabobank is betting that “The Bank of Canada stops hiking before the Fed”, as “There is more interest rate sensitivity in the Canadian economy than the U.S. economy”. 

Economists at RBC Further note that “CAD-positive yield differentials earlier this year have evaporated at the short end of the curve and now stand healthily in the USD’s favour. That may not last but it is a clear impediment for the CAD right now."

Crude Rallies, Macklem Hawkish, But CAD/USD Weakens As Fed Hawks Have their Day
 

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