USD/CAD Reacts To China’s demand for oil

The USD/CAD pair is trading near the highs of the day towards the North American close. US oil continues to bleed out and correct the Ukraine crisis rally. Eyes will be on the US CPI data and the Bank of Canada this week.

At 1.2635, USD/CAD is higher by 0.51% and has moved between 1.2562 and 1.2637 on the day so far as the price of oil slides to a fresh corrective low on the daily charts and the US dollar bounces back to life.

The Canadian dollar, which trades as a proxy to the price of oil, is pressured with US oil, WTI, losing some 3.4% at the time of writing as it trades at $94.60, $1.50c higher from the lows of $92.96. These were the lowest levels in more than six weeks due to how China has reported a record number of new Covid-19 infections, cutting into demand expectations for the world’s largest crude oil importer.

China on Sunday reported more than 26.000 new Covid-19 infections despite the extended lockdown of Shanghai, a city of some 26-million continues. The rising new wave of the coronavirus in China is raising expectations the country’s oil demand is slowing. In turn, the rally associated with Russia’s invasion of Ukraine is being unwound.

Meanwhile, both economic and geopolitical risks continue to weigh on sentiment and this week’s US Consumer Price Index data as well as the Bank of Canada meetings will be critical events for markets. The Bank of Canada is expected to hike by 50bps while announcing an end to reinvestment in a hawkish policy statement.

GDP and CPI are both tracking above the January MPR, and the Bank remains keenly focused on controlling LT inflation expectations. On QT, the Bank is expected to cease GoC purchases in the secondary market by May, but maintain primary market retention going forward.

As far as US inflation goes, the Federal Reserve is behind the curve. Core prices likely stayed strong in March, advancing a firm 0.5% MoM and the 10-year yields are responding in kind. They have traded at a new cycle high near 2.793% on Monday and are on track to test the October 2018 high near 3.26%.

With inflation expectations remaining fairly steady, the real 10-year yield has risen to the highest since March 2020 and is poised to move into positive territory for the first time since before the pandemic.

Additionally, the 2-year yield that tends to track the Fed sentiment the closest, is now trading near 2.60% and is on track to test the November 2018 high near 2.97%, moving in the US dollar’s favour. Between the likely return of risk-off impulses and the even more hawkish Fed outlook for tightening, we believe the dollar uptrend remains intact.