USD/CAD – Canadian Dollar Catches Rate Hike Fever

– Geopolitical tensions spooking markets

– FOMC and BoC meetings on Wednesday

– Safe haven demand lifts USD, CHF, and JPY, sinks commodity currency bloc

USDCAD Snapshot: Open 1.2562-66, Overnight Range-1.2561-1.2629, previous close 1.2632, WTI open $86.11, Gold open $1846.72

The Canadian dollar caught rate hike fever overnight. USDCAD dropped from 1.2632 at the New York close and is trading at 1.2561 in early NY markets, ahead of today’s Bank of Canada (BoC) monetary policy meeting.

The BoC monetary policy statement and Monetary Policy Report, due at 10: 00 am ET, are expected to have a hawkish bias, with the odds for a rate-hike being a coin-toss.

Those in the rate hike camp cite 4.8% y/y inflation, an upbeat Business Outlook Survey, robust employment gains, and shrinking capacity for reasons supporting a 0.25% rate increase to 0.50%.

Those that expect rates to be left unchanged point to the latest Omicron variant outbreak that sparked business closures and tighter restrictions in many regions of the country provides all the ammunition the BoC needs to remain sidelined.

If the latter view is correct, it would not be a stretch to expect USDCAD to rebound to 1.2650 rate hike positioning gets reversed. On the other hand, a rate hike should see USDCAD probe support at 1.2490.

The Canadian dollar got an added lift from the improvement in global risk sentiment after European equities, and Wall Street futures rallied sharply overnight. The German DAX and French CAC indices gained 2.2% (as of7:45 am ET), while S&P 500 futures climbed 1.4%.

The Canadian dollar saw renewed demand after West Texas Intermediate (WTI) oil prices rose to $86.51/barrel in early NY trading. Oil prices are underpinned by shrinking US crude inventories and supply disruption concerns due to Middle East and Russia/Ukraine tensions.

The main event today is the FOMC meeting at 2:00 pm ET. The statement is expected to be hawkish, confirming that the first of four 2022 interest rate increases will occur in March. As usual, the press conference is the wild card. Fed Chair Powell’s response to questions about inflation and balance sheet reduction could spook markets.

EURUSD traded with a negative bias in a 1.1276-1.1310 range overnight, with prices weighed down by a hawkish Fed outlook and by comments from ECB policymaker Gediminas Simkus who warned that Russia/Ukraine tensions were a bigger risk to the economic outlook than Omicron.

The rest of the G-10 majors managed small gains as risk sentiment improved. USDJPY was the exception, with pricing rising as the US 10-year yield ticked higher.

Today’s US economic data will be ignored due to the FOMC meeting.

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