USD/CAD Trades Flat in Volatile Trading After Hot Inflation Report Undermines the Dollar

Key Insights

• The dollar traded flat against the Loonie.
• Benchmark yields eased following the March inflation report.
• Oil prices jumped 7% on China’s easing of lockdown restrictions.

The dollar moved lower against the Loonie due to hot US inflation data and rising oil prices that underpinned the commodity-linked Loonie. Benchmark yields retreated following the latest data. Gold and silver prices increased as they are a hedge against inflation.

Although the dollar index edged higher after the inflation report, hawkish Fed policy has been priced, limiting gains. Oil prices rose as OPEC announced that it would not be able to replace 7 million barrels per day of oil and other liquids lost in the Russian sanctions.

OPEC lowered its production to 530,00 bpm per day and cut its demand due to the impact of the Russia-Ukraine conflict. Another factor is that China lockdowns have eased, quelling fears about a dearth of oil demand.

The March CPI climbed 8.5% from a year ago, the greatest annual gain since 1981. The reading was slightly above expectations of 8.4%. , However, Core inflation, which excludes food and energy, rose 6.5%. Core PCI rose 0.3%, less than the 0.5% estimate. 

Despite the easing of Core PCI, real earnings are not keeping up with the cost of living. This could lead to increasing inflation pressures. The report is critical for how aggressively the Fed will raise rates and taper its bond purchases.

Technical Analysis

The USD/CAD remains little changed against the Loonie as the inflation report put downward pressure on the dollar. Higher oil prices also underpin the Loonie. The focus is on the Bank of Canada, likely announcing hawkish rate hikes on Wednesday. 

Resistance is seen near the 50-day moving average of 1.266. Support is seen near the 10-day moving average of 1.254. Short-term momentum is negative as the fast stochastic had a crossover sell signal.

Medium-term momentum is positive as the MACD line generated a crossover buy 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).