USD/CAD inter-markets: Buy the pullbacks on Fed/BOC policy divergence?

The USD/CAD pair is seen extending its rebound from near 1.3050 region so far this week, mainly driven by higher treasury yields, as recent hawkish Fedspeaks raise odds for a March Fed rate hike.

Moreover, the greenback regained ground across the board after Trump’s speech, which highlighted a $ 1 trillion infrastructure spending program and more importantly raised raises the prospects of a more productive relationship between the White House and Congress.

Meanwhile, Loonie fails to buy into any recovery in oil prices, as rising crude inventories as well as US production levels continue to dampen the sentiment around the commodity-currency.

Instead, the major is seen getting highly influenced by widening yield differentials between the 10-year treasury yields and its Canadian counterpart, tilting in favor of the greenback amid divergent monetary policy outlooks between the Fed and Bank of Canada (BOC).

Goldman Sachs raised the probability of a rate hike in March to 60% versus 30% seen previously, while the BOC is expected to make no changes to its monetary policy today. However, the BOC may not rule out further scope for easing in the coming months, taking into account the large downside risk to the outlook.