USD/CAD Rallies On Hawkish FOMC Minutes, Expected BoC’s Rate Hike

The commodity currencies were the hardest hit immediately after the release of the Federal Open Market Committee minutes. USD/CAD rallied after a knee-jerk blip to the downside and reached a high of 1.25558. Simultaneously, in another blow to CAD, WTI futures settled at the lowest level in around a month.

The US Dollar Index has run to the highest level for 2022 at 99.769 following the minutes that showed that the Federal Reserve officials expressed anxiety about inflation.

The members of the FOMC have finalized plans to shrink bond holdings in an aggressive effort to curb rising prices. The Fed is preparing to shrink the $9tn balance sheet at a pace of roughly $95bn a month.

The US dollar quickly reversed course to the said highs, but despite that the FOMC won’t hesitate to deliver one or more half-point rate hikes, the dollar is back under pressure again, resting in the 99.60s at the time of writing.

The commodity currencies are overall bearing the brunt of the US dollar move, with high beta to the equities that are also suffering.

All options reviewed by policymakers featured a more rapid pace of balance sheet runoff than in the 2017–19 episode,” the minutes said.

Several officials say one or more 50bps rate hikes may be warranted and many members sought a 50bps March hike if there was not a Ukraine war. “Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified,” the minutes said.

As for oil, inventories of commercial crude unexpectedly rose last week following a decrease last week, government data showed Wednesday, driving down oil prices in recent trading.

Oil stockpiles grew 2.4 million barrels to 412.4 million barrels in the week ended April 1, the Energy Information Administration said. Supplies were about 14% lower than the five-year average for this time of year. Analysts had expected a decrease of 2.1 million barrels, according to Investing.com. A week earlier, the inventories fell by 3.4 million barrels.

West Texas Intermediate crude futures slid 3.1% to about $98.83 a barrel, while Brent fell 2.7% to $103.79 in recent trading. Spot WTI is down some 4% at the time of writing.

Meanwhile, the Bank of Canada’s tightening expectations are running hot after it started the cycle with a 25 bp hike to 0.5% earlier this month. Nearly 85% odds for a 50 bp hike at the April 13 meeting. Looking ahead, swaps market sees the policy rate at 3.0% over the next 24 months.