USD/CAD Soars on China Covid Situation, Declining Oil Prices, and Aggressive Fed Tightening

Key Insights

• Gold and silver fall due to aggressive Fed rate hike prospects.
• Benchmark yields fall on China’s uncertain Covid situation despite the hawkish Fed policy.
• Oil prices tumbled on uncertain demand due to China’s Covid lockdowns. 

USD/CAD hits multi-week high as expectations for a 50-point rate hike underpinned the dollar. The dollar strengthened against all major currencies. Benchmark yields declined sharply today after spiking at the end of last week amid concerns over China’s Covid shutdowns. 

Gold prices declined to April lows below $1900 amid rate tightening expectations and a strong dollar. Oil prices declined on demand concerns due to China’s Covid situation. Oil prices also lowered as the dollar strengthened because a robust dollar makes commodities more expensive for other currency holders.

The oil market had tight supply due to the Russian supply crisis and outages in Libya. St. Louis Fed President Bullard stated that a 75-basis point rate hike might be necessary to rein in inflation.

While no other Fed official backed that up, stating that a larger rate hike would weaken the economy, other market participants have endorsed it. Investors’ focus will be on the March Personal Consumption Expenditures Index, which is a critical inflation measure and is to be released Friday.

Federal Reserve Chair Jerome Powell stated that a 50-basis point rate hike was likely in May. 

Technical Analysis

The USD/CAD extended gains for the third consecutive trading session, reaching the 1.276-1.277 region.  The currency pair is up 0.48% today and rose over 1% over the weekend. Falling crude oil prices, which dropped to their two-week low, undermined the Loonie.

This situation was a tailwind for the dollar. Technical indicators stay in the positive territory, supporting a bullish outlook. This scenario supports movement in the positive direction in the near term to 1.2780-1.2785. A convincing break below the 1.27 level will undermine the positive near-term outlook.

A slight pullback below 1.27 can be a signal to buy the dip. Resistance is seen near the March 11th high of 1.278. Support is seen near the 50-day moving average near 1.264.

Short-term momentum turned positive but is decelerating as the fast stochastic had a crossover buy signal. Medium-term momentum is positive as the MACD line generated a crossover sell signal.

This scenario happens when the MACD line (the 12-day moving average minus the 26-day moving average) crosses the MACD signal line (the 9-day MA of the MACD line). The trajectory of the MACD is in positive territory, which reflects an upward trend in price movement.