USD/CAD pushes on towards 1.2900 as hawkish Fed’s Waller spurs US dollar gains

Some had thought that this week’s rollercoaster ride in FX markets might have been over by the midpoint of the US session but hawkish rhetoric from influential Fed board member Christopher Waller has injected a dose of dollar strength that has accelerated USD/CAD’s upwards trajectory. Waller said that the "whole point" of the Fed's decision to accelerate the pace of its QE taper was to make the March Fed meeting "live" for a first rate hike. A hike in March, he said, was now his base case, although he could see the hike pushed out to May.

According to the CME Fed Watch, markets are now pricing a roughly 50% chance that the Fed hikes rates by 25bps to 0.25-0.50% from 0.0-0.25% in March. The hawkish repricing in USD Short-Term Interest Rate (STIR) markets has helped to push USD/CAD above the 1.2850 level and the pair is now eyeing a test of the 1.2900 level. At current levels in the 1.2880 area, the pair is trading with gains of about 0.85% on the day and is one of the worst-performing G10 currencies alongside NZD and SEK, weighed amid a sharp drop in crude oil prices.  

A break above 1.2900 would likely open the door to a test of the initial post-Fed meeting highs near 1.2940. To recap the Fed’s meeting quickly, the Fed doubled its QE taper speed and indicated as many as three rate hikes in 2022. In the post-Fed press conference, Fed Chair Jerome Powell avoided being as explicit about the timing of rate hikes as Waller.

Notably, Waller has been ahead of the curve regarding the Fed’s shifting stance in recent months and was calling for a faster QE taper and earlier rate hikes (alongside FOMC member James Bullard) long before this become the consensus view of the committee. In that regard, he is one to watch out for at the Fed as a potential “thought leader”. A March hike would likely position the Fed as implementing their first rate hike ahead of the BoC, who have indicated lift-off could occur in the middle quarters of 2022 (i.e. no earlier than April). That means USD/CAD could be vulnerable to further hawkish Fed induces upside.