1.4230: Fed tightening expectations lift the Greenback as Canadian Dollar falls to four-week lows

• USD/CAD reaches a fresh four-week high of 1.4230, gaining nearly 2% in less than a week.
• Stronger-than-forecast US inflation, alongside a robust labour market, has reinforced expectations of a rate rise of at least a quarter-point at the Fed’s next meeting. 
• Contrasting employment figures from the US and Canada published on Friday are likely to underpin the pair above 1.4000, in the view of TD Securities' analysts.

A gain of nearly 2% in less than a week has taken USD/CAD to fresh four-week highs of 1.4230 as the US session opens. The Canadian Dollar (CAD) has returned to its downward trend on Wednesday, while the US Dollar (USD) advances broadly as investors strengthen their expectations of Federal Reserve (Fed) tightening in December.

October’s above-forecast consumer inflation figures from the US Bureau of Labour Statistics (BLS) have prompted speculative investors to buy the Greenback. Together with Friday’s strong Nonfarm Payrolls (NFP) report, the data have reinforced expectations for a rate increase of at least a quarter-point at the Fed’s December meeting.

Fed comments reinforce December rate rise bets of at least a quarter-point

Comments from Fed officials late on Tuesday lent weight to those expectations. Philadelphia Fed President Anna Paulson signalled “further gradual tightening” ahead to return inflation to target. Dallas Fed President Lorie Logan struck a similar tone, stating that “the Fed needs at least two more quarter-percentage-point  increases.”

Ahead of the US Consumer Price Index (CPI) release, Fed Governor Christopher Waller had said that an inflation reading of 0.3% or more would lead him to support a 25-basis-point rise. The eventual increase was 0.4%. He also said that “I believe a 50-basis-point hike in the policy rate should be considered”. According to the CME’s FedWatch Tool, futures markets now assign a 12% probability to a jumbo rate increase in December, up from practically none last week.

Canada presents a different picture. Released at the same time as the US NFP figures, October’s employment report recorded a net fall in employment and an increase in unemployment. TD Securities analysts say that “diverging employment data releases will likely keep USDCAD supported above 1.40,” because a “rising unemployment rate amid falling wage growth rate in Canada also reduces the market pricing of a December BoC rate hike relative to the Fed.” They expect weaker Canadian labour market conditions, alongside a comparatively more hawkish Fed, to maintain pressure on the Canadian Dollar for the time being.