USD/CAD is flat the day after moving between a low of 1.3448 and 1.3489, currently trading at 1.3460 and retreating in midday New York trade. The Canadian Dollar was initially offered on Thursday ahead of a parliamentary appearance by Bank of Canada Governor Tiff Macklem. Additionally, oil prices continued to deteriorate, one of Canada’s major exports.
Fed Hawks Back In Town
The hawkish theme surrounding the Federal Reserve has returned, supporting US yields and the US Dollar and weighing on the oil price. West Texas Intermediate crude is down 2% on Thursday.
As for the Federal Reserve, the futures pricing has shown an 85.7% chance the Fed will hike rates 25 basis points when policymakers conclude a two-day meeting on May 3, according to CME’s FedWatch Tool. The hawkish sentiment was kicked off by Federal Reserve´s Governor Christopher Waller last Friday said that despite a year of aggressive rate increases, the Fed “hasn’t made much progress” in returning inflation to their 2% target and argued that rates still need to go up. As such, the likelihood of a rate cut by December has narrowed considerably this week.
The latest guidance is very much in line with market pricing, and Atlanta Fed President Bostic said that he favors one more 25bp rate hike and then a pause. Bostic explained that tightening credit conditions could do some of the Fed’s work. ´´The Atlanta Fed has historically been seen, rightly or wrongly, as a barometer of consensus on the FOMC,´´ analysts at ANZ Bank said.
Fed Bank of New York President John Williams also said on Wednesday inflation was still at problematic levels, and the US central bank would act to lower it. Looking ahead, the Federal Open Market Committee will enter a blackout this weekend ahead of the 2/3 May meeting.
US Dollar Softer On Data
Nevertheless, as measured by the DXY index, the US Dollar fell on Thursday as weak data reinforced expectations that the world’s largest economy is likely headed toward a recession. DXY, which tracks the greenback’s value against a basket of major currencies, eased 101.632 after sliding on Friday to its lowest level since early February as investors bet the Federal Reserve could pause in June after another expected rate hike next month.
Thursday’s data showed US Initial Claims climbed modestly to 245,000 while the week before was revised to show 1,000 more claims than previously reported. The Philadelphia Fed showed factory activity in the mid-Atlantic region plunged to the lowest level in nearly three years in April. Existing Home Sales also fell after an increase in February for the first time in a year.
US rate futures are now pricing a roughly 69% probability of a pause in June.
Eyes on BoC
Meanwhile, the focus is on the Bank of Canada´s governor Tiffany Macklem. On Tuesday, Macklem said in testimony in the House of Commons that inflation is coming down quickly. However, continued strong demand and the tight labor market are putting upward pressure on many service prices, which are expected to decline only gradually.
On Thursday, Macklem said there had been a steady improvement in inflation and modest economic growth. He has stated that it is not a significant concern’ if the Fed raises rates more than BoC, ‘we have an independent monetary policy.’
Meanwhile, money markets expect the BoC to leave its policy rate on hold at 4.50%, a 15-year high, through the end of the year.
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