USD/CAD rallies to 1.2700 level as loonie battered amid broad risk asset rout

• USD/CAD is currently probing the 1.2700 level having rallied from the mid-1.2500s on Monday amid widespread losses for risk assets.
• Safe-haven demand amid geopolitical tensions and amid pre-Fed positioning has boosted the US dollar.

USD/CAD has continued to push higher in recent trade as the global risk asset rout has accelerated during US trading hours. US equities are now leading the downside, with the S&P 500 now down more than 3.0% on the day, and this is taking its toll on risk-sensitive currencies, of which the Canadian dollar is included. USD/CAD is now testing the 1.2700 level having started the day closer to 1.2550 and is on course to post on-the-day gains of about 1.0%. The loonie’s losses are on a similar scale to those being seen in its risk-sensitive G10 peers, like AUD (-1.1%), NZD (-0.8%), GBP (-0.8%) and NOK (-1.5%).

Monday’s swift move higher marks a clean upside break of the 1.2450-1.2550 range that had prevailed over the past week and a half and has seen the pair move above its 21-day moving average at 1.2640. USD/CAD hasn’t yet been able to surpass its 50DMA at just above the 1.2700 level, which is now acting as resistance. But if US stocks keep dropping at the present rate, it's only a matter of time. A break above 1.2700 would open the door to a test of the next major area of resistance around 1.2800.

US dollar strength as market participants look for safe-haven assets (the dollar’s safe-haven G10 peers the yen and Swiss franc are also doing well), but also as markets pre-position for a hawkish Fed meeting this week, is driving the upside. The bank is expected to pave the way for rate lift-off in March and will also continue to discuss its quantitative tightening (QT) options, which Fed Chair Jerome Powell is likely to talk about in the press conference. The minutes of this meeting will also be hotly anticipated a few weeks later for information on the QT discussion.

Some analysts/markets commentators have been going a bit over the top in recent days with their Fed calls (for example, some calling for the bank to hike at every meeting this year), meaning the bar to exceed already very hawkish expectations is high. But in a risk-off, hawkish Fed-dominated market environment, the argument to be short USD this week is not a strong one. One thing to note for USD/CAD is that if geopolitical tensions continue to escalate, this might drive oil prices back up again (they are currently down today in tandem with other risk assets). That could shelter the loonie from dollar strength to a degree.