The US dollar is up again this morning as the Fed-fueled rally continues for the greenback. The Canadian dollar has not been immune to the US dollar’s strength and is currently down over 2% for the week. Most of that move has happened since Wednesday afternoon when the Federal Reserve took a somewhat surprising hawkish tone in its messaging. The markets interpreted that shift as signaling sooner-than-expected tapering of extraordinary U.S. monetary stimulus and have been reacting since then. Fed members now project two rate hikes in 2023 whereas previously none had been expected until 2024. The Fed also acknowledged the risks of inflation in a more concrete way than it has in the past and also said that it had begun discussing scaling back bond purchases. All of that made the US dollar relatively more attractive and caused the surge in the US dollar. The change in tone has also knocked stocks off their recent record levels and pushed oil off of its multi year highs. That has further compounded the weakness of the Canadian dollar which had been supported by strong stock and oil prices in the last few months. While these projected changes to the path of monetary policy represent a fundamental change in the macro environment, their short term effects will not last forever and we expect USD to CAD to level off at these levels in the very short term.
