Fed Chair Powell incites rate speculation on Thursday. USD/CAD reverses.

US 10-year Treasury yield increases 5 basis points to 2.875%.

Canada 10-year note increases 10 points to 2.871%

FXStreet Forecast poll predicts upside technical failure.

As inflation driven speculation, the Federal Reserve and Bank of Canada added another verse to their policy roundelay.

Canadian consumer inflation rose to 6.7% in March (YoY), much higher than the 6.1% forecasted, which was 5.7% in February. With a 1.4% monthly increase, the Consumer Price Index (CPI), reached its highest annual rate ever since February 1991. The Bank of Canada (BoC), which measures core inflation, increased 1% in the month. This was double the expected result, and brought the annual rate to 5.5%, from 4.8%. The consensus forecast was for a decrease to 4.2%.

On Wednesday, the USD/CAD cascade started when the release at 8:30 AM sent the pair through support level of 1.2570. The rest of the US market saw selling continue with the closing of 1.2496, just a point above the low of 1.2482. The Dollar Canada was at 1.2500 in the Asian session, and it was below that level in Europe on Thursday. Federal Reserve Chair Jerome Powell suggested that the bank might consider half-point increases at its next two meetings.

"I would think that 50 basis points will have been on the table for May meeting," said Powell in an IMF panel he shared among others with ECB President Christine Lagarde. He also confirmed that June would see a second Fed hike. Powell stated that there was something to be said about front-end loading. He also suggested that 50 basis points could be on the table.

USD/CAD responded by closing at 1.2582 on Wednesday and continuing to rise on Friday, trading at 1.2721. This is its highest level since March 16.

The BoC increased the overnight rate by 0.5% to 1.0% last Wednesday, marking the first 50-point jump in over 22 years. Tiff Macklem, Governor of the Bank, stated that the bank will reduce its C$350billion ($275 billion), portfolio acquired during the pandemic. The bank will not reinvest the proceeds from maturing securities. The BoC could see about one quarter of its holdings being liquidated over the next year.

The next policy meeting will be June 1. Overnight swaps have fully priced in an increase of half-point in the overnight rate up to 1.5%.

The Fed could raise 0.5% to 1.0% on May 4, and then add 0.5% on June 15. This would mean that the policy rates for the two banks would be the same at 1.5%. These well-telegraphed, alternating rate increases have negated any currency impact. They were accompanied by nearly identical increases in the bond yields of each country.

The yield on the US 10-year Treasury rose 8 basis points per week to 2.904%. Canada's version climbed 10 points to 2.873%.

The West Texas Intermediate (WTI), and the Bloomberg Commodity Index(BCOM) both fell 4.9% and 4.4% on the week respectively, keeping pressure on Canada's resource-backed dollar. The loonie has been supported by sharply rising commodity prices in the last year, which helped to defuse the overall rise in the US dollars.

Canada's consumer inflation was the most important release, but two producer gauges, Industrial Product Prices (and the Raw Material Price Index) promise greater inflation pain. The industrial product prices are a measure of the costs for major commodities that Canadian manufacturers sell. They rose by 4% in March, more then twice the 1.7% forecast, and up from 2.6% last February. After leaps of 6.4% and 6.5% in February and January, the raw material index, which tracks commodity prices paid to manufacturers, rose 11.8% in March.

Retail sales were higher than expected in February, rising 0.1% per month and 2.1% annually on estimates of -0.1%. However, there was no USD/CAD reaction. January's sales were revised up.

The US's Powell comments were the main market news. The sharp rise in mortgage rates caused a slight drop in existing home sales in March. This was reflected in the fact that they fell a little more than anticipated. Building Permits, Housing Starts and Housing Permits were at or close to their highest levels since the bubble that burst a decade ago. In the April 15th week, 184,000 initial jobless claims were received. After the previous two weeks' totals, the 4-week moving average was 177,250. This is the third-lowest record.

Fed Chair Powell stated in Thursday's IMF appearance, that the demand for workers was "too hot", and that it is not sustainable.

USD/CAD outlook

Jerome Powell may be able to break the USD/CAD immediate longjam, but it is still a long way from the effective 1.2900 range over the past 10 months. This trend is also new.

The May 4 Fed meeting was the last time USD/CAD speculation had been seen. The deliberate reference by Powell to a 50 basis-point hike in June has made policy more aggressive. Although the Fed may have taken a rhetorical advantage of the BoC, it will still leave banks with the same base rates in June. Both countries' bond yields have moved in unison higher.

The Ukrainian war is now deadlock. Although Kyiv appears secure from defeat, it is far from winning. Russia continues its aggression in the east, leaving no prospect of a negotiated solution. Russia's sanctions will remain, which has prevented commodity and oil prices from falling to their pre-invasion levels. Rapid central bank tightening and rising inflationary pressure on consumption have brought recession fears to the forefront for the second and third quarters. Any sign that the US consumer is cutting back on spending could reduce the floor for commodity prices.

A Canadian dollar's biggest risk is a possible economic slowdown or recession. This would reduce the currency's main support. The USD/CAD prospects will improve as this possibility increases. Although the USD/CAD balance is not yet at full strength, there are signs that it will.

The week ahead will be sparse for Canadian information, with only February GDP available. There may be comments from Governor Macklem and other BoC officials in speeches about policy.

The US's first quarter GDP is important. The fourth quarter's 6.9% growth rate is expected to fall to 1.0%. Atlanta Fed estimates 1.3%. Any deviation from this forecast, particularly if it is close to zero, will affect the Fed's rate plans as well as Treasury rates . This will also impact the US dollar and Treasury . The strong Retail Sales figures should be reflected in March's Durable Goods Orders. Friday's March Personal Consumption Price Index (the Fed's preferred gauge) will not add to the inflation picture. Neither will the Personal Income or Spending numbers.

The USD/CAD outlook price is higher.