USD/CAD breaches 1.2800, eyes November highs at 1.2850 as risk appetite deteriorates, USD strengthens pre-Fed

USD/CAD has been gunning to the upside on Monday and has recently moved above the 1.2800 level, having started the week only just above 1.2700. That amounts to a 0.7% move to the upside and means that most of last week’s losses have now been eroded. Recall that USD/CAD fell from around 1.2840 to lows just above 1.2600 last week. If the pair can break to the north of 1.2800, the next key area of resistance to watch out for is at 1.2850. Beyond that, it’s the summer highs in the 1.2900-1.2950 region.

The pair’s move higher comes amid a broad sell-off in risk-sensitive currencies - NZD and AUD are down by a similar amount to CAD, whilst NOK is down more than 1.2.% on the session – as risk appetite deteriorates. CAD’s downside doesn’t seem to have anything, in particular, to do with any Canada-specific news, though, notably, the BoC did announce the conclusion of its monetary policy framework review. The bank will keep its inflation target at the 2% midpoint of a 1-3% range and said it would keep rates lower for longer if needed to optimise employment outcomes, as expected.

Rather, it is selling pressure in global equities that is likely to be the main reason for the acceleration of CAD depreciation in recent trading. Since the open of US markets at 1430GMT, global equities have been under selling pressure. The S&P 500 posted a record close last Friday, so profit-taking ahead of what is going to be a busy week of central bank events and data is likely driving the downside. But even before stocks started dropping, USD/CAD was already higher amid broad USD strength.

The main event as far as USD/CAD is concerned this week is the Fed’s monetary policy decision on Wednesday, where the bank will likely announce an acceleration of the pace of its QE taper plans. The bank’s new dot plot and economic forecasts will also be key points of focus, as will (as usual) the updated policy statement and remarks from Chairman Jerome Powell in the post-meeting press conference. As noted, even prior to the deterioration in risk appetite, the US dollar was on the front foot on Monday, with markets seemingly positioning themselves for a more hawkish outcome. Whether the Fed can live up to the hawkish expectations already priced into money markets (three hikes are seen in 2022) is another question.