USD/CAD Bears Defeat Bulls at 1.26 as Oil Remains Firmly Bid

USD/CAD is a little heavy at the Tokyo open, turning red on the day and testing 1.26 at the time of writing, down from a rollover high of 1.2634 in early Asia.

In general, it's been a story about the US dollar at the start of the week, which is now regaining some ground. In the case of the CAD, oil prices have stabilized as well, bolstering the loonie as investors anticipate Wednesday's inflation report.

Investors will be watching the March Consumer Price Index for guidance on whether the Bank of Canada will continue to tighten policy following last week's half-point move to 1%. This was the central bank's largest single increase in more over two decades, and it was implemented in an attempt to rein in inflation.

"We expect March CPI to rise to 6.1 percent year on year, with prices rising 0.9 percent month on month," TD Securities analysts noted. "Energy will be the primary driver, with an increase of 11% in gasoline and another large contribution from food. Automobiles, clothing, and shelter should contribute to the ex. food/energy aggregate's strength, while the Bank of Canada's core inflation measures should average 3.6 percent y/y," according to TDS analysts.

US Oil Prices Increase

Meanwhile, West Texas Intermediate (WTI) crude oil finished higher on Monday as concerns about Chinese demand amid Covid-19 lockdowns were countered by supply problems in Libya. Futures finished +1.2 percent higher at $108.21 a barrel as a result of the Libyan outages, which have heightened concerns about global supply constraints. The country's National Oil Corporation announced force majeure at an export port following the shutdown of the country's main oil field due to demonstrations over cancelled elections.

In thin trade, the dollar strengthened to a new two-year high, tracking higher US Treasury yields. Investors are reinvesting in the dollar and bracing for several Federal Reserve rate hikes of half a percentage point.

The US rate futures market has priced in a 96 percent probability of a 50 basis point tightening at the Federal Reserve's May meeting and approximately 215 basis points in cumulative rate rises in 2022, allowing for enough speculative positioning into the greenback. Meanwhile, the benchmark 10-year US Treasury yield reached a three-year high of 2.884 percent.

USD/CAD