- Risk sentiment is mildly positive
- FOMC minutes on tap today
- US dollar softer compared to Tuesday
USDCAD Snapshot: Open 1.2716-20, Overnight Range-1.2699-1.2724, previous close 1.2705, WTI open $76.98, Gold open $1818.42
The Canadian dollar is marking time ahead of the release of the FOMC minutes from the December 15 meeting. That was the meeting where the Fed doubled the pace of tapering with plans to end the program in March 2022. The market has already priced in a 90% chance that the first Fed rate hike occurs two months later, in June, suggesting these minutes will be anti-climatic.
The Canadian dollar may also be under pressure from renewed trade hostilities with the US.
The US Mexico Canada (USMCA) free trade agreement has provisions for dispute settlements. The dispute panel ruled that Canada’s dairy protections violate the deal. Canada insulates its dairy industry from foreign competition by levying a slew of tariffs on imports, which also inflates Canadian consumers’ prices for milk, butter, eggs, etc.
In November, the US attacked Canada’s softwood lumber, slapping punitive tariffs on Canadian imports, despite several World Trade Organisation rulings that Canada does not subsidize the products.
President Biden’s tax credit plan for electric vehicles is the latest volley in the undeclared trade war. Canada is complaining that the subsidy for American-built electric cars is the equivalent of a 34% tariff on Canadian vehicles.
President Biden already canceled the Keystone XL pipeline, a serious blow to Canadian oil export volumes.
All of the above trade issues suggest the Canadian dollar will struggle to maintain a sustainable rally in 2022 as it will weigh on domestic growth and government revenues.
The Canadian dollar benefitted from modestly higher crude oil prices. WTI rose from $76.54 to $77.36/ barrel overnight after the American Petroleum Institute (API) reported crude inventories fell by 6.34 million barrels in the week ending December 25. In addition, Opec downgraded the amount of the projected oil surplus in Q1 2022 due to Omicron being less severe than expected.
EURUSD bounced in a 1.1278-1.1324 band ahead of the FOMC minutes. Prices saw a little support after ECB policymaker Francois Villeroy suggested inflation was peaking.
GBPUSD remains in a minor uptrend channel from December 20, with prices supported by the outlook for higher UK rates. GBPUSD is also underpinned because the UK reaction to the Omicron outbreak was far milder than many euro area countries.
ADP employment and Canadian Housing Price Index reports are due.
