By Michael O’Neill

In Greek mythology, Pandora opened a tainted gift from Zeus and unleashed a torrent of evils, sickness, and death into the world.

A relative may have done it again. A new plague of evils is infecting the world including demi-god warmongers, pandemics, and anti-government protests.

The four horsemen of the apocalypse are already on the scene.

 Russia President Vladimir Putin rides War. He sits astride his big red pony with ambitions of bringing Ukraine back under Mother Russia’s umbrella while thwarting NATO’s plans to install missiles on his borders. NATO’s aspirations toward Ukraine are emboldened by President Biden who inflames tensions by claiming to know Putin’s invasion plans.

Canada, the UK, and the US  are treading along the same path as their ancestors did in 1914, (they sent troops to many of the same Balkan countries that were ground zero for World War l), ostensibly to shore up NATO, while conveniently ignoring that Ukraine is not part of that military alliance.

China’s Xi Jinping sits on Conquest. He gallops along the pier in Shishi, Fujian Province, looking longingly at Taiwan, a mere 261 km across the Taiwan Strait. The man who wishes to be “President-for-Life” insists Taiwan is part of China while forgetting that the island was ceded to Japan in 1895, by the last Emperor of China. Mr Jinping uses his country’s economic clout to ensure the United Nations does not recognize Taiwan as an independent nation. It is not a stretch to imagine Chinese forces would occupy Taiwan when the west is embroiled with a Russian invasion of Ukraine.

North Korea’s rotund leader Kim Jung-un is on Famine ( who may soon be called Lunch), especially if a BBC article last November is accurate.  The story claimed North Korea is suffering from another poor harvest and a large number of citizens are starving. Last July the United States Department of Agriculture ​estimated that ​16.3 million people in the North — 63.1 percent of the population​ — were “food insecure.”

Democracy is riding Death. That may be a little extreme, but there isn’t a horse called “hobbled.” President Trump got the ball rolling during his administration and with his orchestration of the January 6 Capitol Hill invasion.

Demonstrations against draconian anti-pandemic measures spread, well like the pandemic, across the globe. Tensions were inflamed further following reports that government officials in many jurisdictions ignored the rules and didn’t face any penalties.

Canada was not exempt. A group of truckers in British Columbia became upset after the Trudeau government changed the rules (again) and barred unvaccinated drivers from crossing the border. They decided to show their displeasure by driving their trucks to Ottawa in what they called “the convoy for Freedom 2022. The protest snowballed into a massive, country-wide demonstration by people from all walks of life, that closed borders and shut-down Canada’s capital city. In response, the Trudeau government declared a very polite Canadian version of  “martial law, which would make George Orwell proud.

Traders are fully aware of the geopolitical risks which are why the US dollar index and gold prices are at an 18-month peaks, while oil and Treasury yield gains have accelerated.

Geopolitics aside, the most pressing problem for financial markets and the Canadian dollar is inflation. Canadian inflation is far above the Bank of Canada’s (BoC) target and has been for a while

Source:  Bank of Canada

In a speech on February 16, Deputy Governor Timothy Lane admitted that the Bank got it wrong. They guessed wrong about the impact of massive government spending for covid-impacted businesses and workers.  They guessed wrong about consumer spending. They failed to grasp the extent of supply disruption and all of the above explains why inflation is far higher than they expected.

Mr Lane said the BoC changed its outlook but if so, why do they continue to expect inflation to drop in the second half of 2022?

Nevertheless, Canadian inflation isn’t the biggest issue facing the Canadian dollar. It is US inflation and what the Fed decides to do about it. US CPI was 7.5% y/y in January and the Producer Price Index surged 1.0%, the latter being just below the biggest jump on record (1.2% m/m January 2021).

Federal Reserve Bank of St. Louis President James Bullard reiterated calls for a 0.50% Fed rate hike in March. The odds are around 50/50 of that occurring, but even if it happens so what? US rates will need to rise to 2005 levels of 5.0% at least, to put a damper on inflation.

The US dollar will continue its merry march higher if the Fed embarks on an aggressive hiking cycle. However, USDCAD gains may be limited if the BoC matches the Fed moves.

USDCAD should sink if Russia invades Ukraine due to the combination of higher oil prices and safe-haven demand for Canadian dollars.

USDCAD would probably rise if China invaded Taiwan as the G-10 would curtail raw material exports.

The four horsemen may be at large, but FX traders do not really care.   To them, the horses are either an exotic lunch or something to bet on over dinner and drinks at their favorite track.