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USDCAD D1 05 16 2022 13310

The US dollar strength and higher US yields are the one-two punch continuing to drive risky assets into the red as the week gets under way, with US equity markets at new lows for the cycle ahead of the US open today. I suspect now that in the bigger picture, this cycle of USD strength only ends once US long yields begin falling, and falling because the Fed has exercised its put with new yield caps or because US pension- and/or other rules are changed requiring US savers to hold more treasuries, not because market forces at some point decide that long US treasuries are a superior long-term investment. For now, it would seem talk of such eventualities are premature, although if volatility continues at the current level for much longer, it will sharply bring forward the eventual policy response.

USDCAD W1 05 16 2022 1332

A number of USD pairs are at significant chart tipping point as this week gets under way. The most well defined of these is perhaps the 0.7000 level in AUDUSD, although USDCAD in the 1.2950+ area is quite remarkable as well – an area that has seen at least four prior touches, first as support just prior to the pandemic in early 2020 and then as resistance once the pair crashed back down through that level later that year. Oil prices are challenged from the demand side on Chinese Zero Covid lockdowns and budding behaviour change globally from skyrocketing diesel- and jet fuel prices. The range above there and above the psychological 1.3000 level is considerable – all the way to the double top of 1.4600+ from 2016 and 2020, but the bulk of the time, the 1.3650 area capped the action during those years. If oil suffers a more significant setback over this latest risk deleveraging event, that level could quickly come into play. The private debt leverage is far higher in Canada than in the US and one of the more sensitive sectors to rising rates is housing, which represents a far greater portion of the Canadian GDP growth over the last decade and a half relative to the US – interesting to watch the trajectory of the housing market in both countries after the enormous back-up in yields in recent months.

 

 

 

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