The market environment continues to favour a strong dollar as we head into a weekend where the battle for Ukraine’s major cities looks set to intensify further. The market’s liquidity conditions have weakened this week and were exacerbated overnight after reports of shelling to Europe’s largest nuclear plant in Ukraine. This argues in favour of a stronger dollar.
Domestic factors are also offering support to the greenback, as markets have priced back in some Fed tightening after a speech earlier this week by Fed Chair Jay Powell removed some doubt about the Bank’s policy plans and all but confirmed a 25bp rate hike in March. Fed fund futures are close to pricing back in six hikes by the end of 2022, and a solid US payroll number today could help cement tightening expectations further – ultimately adding to USD good momentum. Consensus is centred around another 400k+ headline nonfarm payroll figure today, with a lot of focus set to be on wage growth, which may have accelerated further from the 5.7% January reading.
While we expect it to be dollar-positive, the NFP impact should be reduced compared to previous instances, as the focus remains on the Russia-Ukraine situation. Today, G7 leaders will meet, and we may hear about more sanctions against Russia. Investors will keep an eye on any hints of a coordinated effort to limit dependency on Russian commodities, which could put more upside pressure on energy prices.
The CAD reversed fortunes over the last 24 hours after being a relative out-performer across the G7. Spot tested the 1.26 area before rebounding well above 1.27. Crude oil is firmer but recent handicaps on the CAD including weaker stocks and higher volatility (VIX) appear to have caught up to the CAD. This week’s BoC rate hike and policy statement suggested a steady ramping up of the Overnight Target Rate in the coming months but provided no insight into the Bank’s plans to reduce its balance sheet. For now, the CAD will take cues from broader market themes and is likely to stay on the weaker side given the continued events in Russia and Ukraine. observe the USD/CAD Chart.
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