During early Wednesday trading in Europe, the USD/CAD pair dropped for the third consecutive day, hitting a weekly low of around 1.3450. The decline in the pair may be attributed to the strengthening of Canada’s main export item, WTI crude oil, and the broad-based weakness of the US dollar ahead of key catalysts.
These catalysts include the Bank of Canada’s Interest Rate Decision, the US Consumer Price Index (CPI) for March, and the Minutes of the latest Federal Open Market Committee (FOMC) Monetary Policy Meeting.
WTI crude oil prices remain steady at around $81.50, with optimism surrounding China’s energy usage and fears of a supply crunch led by the OPEC+ group. Additionally, geopolitical tensions from Russia, China, and North Korea are fueling the prices of the commodity.
The US Dollar Index (DXY) continued to weaken towards 102.00 as Federal Reserve (Fed) officials hinted at softer inflation, weighing on market expectations for a 0.25% rate hike in May. Minneapolis Fed President Neel Kashkari mentioned that he is less optimistic than the bond market on the speed of inflation’s fall.
However, Philadelphia Fed President Patrick Harker and New York Fed President John Williams have signaled that inflation pressures are easing, also impacting market bets on a rate hike in May.
As a result, the CME’s FedWatch Tool indicates a 69.5% chance of a hawkish action by the US central bank in the next monetary policy meeting, compared to 71.2% marked the previous day.
The International Monetary Fund’s (IMF) downward revision of global growth forecasts and Friday’s upbeat US jobs report, along with expectations of BoC’s inaction, are keeping USD/CAD buyers hopeful.
Meanwhile, S&P 500 Futures remain directionless around 4,138 after a mixed Wall Street close, and US Treasury bond yields are grinding higher, prodding US dollar sellers. The US 10-year and two-year Treasury bond yields are both rising, around 3.44% and 4.05%, respectively, during a four-day and five-day uptrend.
Looking ahead, USD/CAD traders should closely observe the BoC statement, as the Canadian central bank has already signaled its hesitancy to increase benchmark rates. If policymakers sound dovish, the Loonie pair may recover quickly, given that the oil price has recently signaled bullish exhaustion.