USD/CAD under pressure despite US dollar strength

USD/CAD is a touch in the red on Wednesday in Tokyo as the US dollar steadies on the bid. The price has slid from a high of 1.2619 to a low of 1.2603, so far. The Canadian dollar was firmer vs, the US counterpart overnight despite rising bond yields that helped underpin the greenback.

The DXY index was higher for the fourth straight day and made a new cycle high at 101.028. The March 2020 high near 103 is the next big target. US dollars were supported by the US benchmark 10-year Treasury yields that hit 2.928% on Tuesday, the highest since December 2018 and are on track to test the October 2018 high near 3.26%.

''With inflation expectations remaining fairly steady, the real 10-year yield traded near -0.04% today, the highest since March 2020 and poised to move into positive territory for the first time since the pandemic began,'' analysts at Brown Brothers Harriman explained. ''The 2-year is still lagging a bit but traded at 2.47% today, not yet matching the 2.60% cycle high from earlier this month but still on track to test the November 2018 high near 2.97%.'' 

Meanwhile, one of Canada's major exports is trading volatile. WTI spot ended the day bid reaching a high of $104.44bbls. However, as analysts at ANZ Bank explained, ''Chinese COVID-zero approach and strict lockdowns are keeping demand prospects subdued.''

The analysts added that ''further, talks around aggressive rate hikes have weighed on market sentiment. So far, the market has shrugged off supply risks emanating from a sixth sanctions package. The EU Commission President said, 'we are currently developing smart mechanisms so that oil can also be included in the next sanction step', suggesting oil may be part of the package. In Libya production fell to 800kb/d after the Sahara field (300kb/d) was closed.''

For the day ahead, Canada's inflation report for March is due on Wednesday which could offer clues on the Bank of Canada policy outlook.

''We look for the Consumer Price Index to firm to 6.1% YoY in March, with prices up 0.9% MoM,'' analysts at TD Securities said. ''Energy will provide the main driver, led by an 11% increase in gasoline, alongside another significant contribution from food. Motor vehicles, clothing, and shelter should help drive strength in the ex. food/energy aggregate, while the BoC's core inflation measures should firm to 3.6% YoY on average.''