Canada returned from a long weekend to find the Canadian dollar probing just above a three-year peak. Global risk sentiment is positive, with traders appearing to believe the U.S. Federal Reserve will leave monetary policy unchanged for an extended period.
Fed officials have been hammering that message home ever since the surprise surge in U.S. inflation reported two weeks ago. CPI rose 4.2% y/y compared to just 2.6% in March, which raised fears the Fed would be forced to increase interest rates sooner than expected.
"Not so," said Fed Chair Jerome Powell and almost every Federal Open Market Committee member.
That sentiment was reinforced again on the weekend. Fed Governor Lael Brainard said officials expected inflation increases due to base effects, and those increases were temporary. She also said, "She also attributed inflation increases to “Some bottlenecks and supply chains are contributing to inflation, which will subside over time."
St Louis Fed President James Bullard said higher inflation readings would be temporary, and he didn’t want to talk about adjusting policy during the pandemic.
Monday’s economic data calendar was empty, so traders reacted to the Fed comments and bought commodities and equities while selling the U.S. dollar, which carried over into today’s session.
Global equity indexes are higher. China’s Shanghai Shenzhen CSI 300 index soared 3.15% as commodity prices rebounded. Japan’s Nikkei 225 index ignored news that the U.S. government issued a "do not travel" advisory to the country, and it gained 0.67%. The German DAX, which has climbed 0.67% leads the major European bourses higher, except the U.K. FTSE 100, which is flat. S&P 500 futures suggest a positive open on Wall Street.
EUR/USD rallied from $1.2150 yesterday and broke key resistance at $1.2250 before losing momentum at $1.2263. The single currency was underpinned by better than expected German IFO Survey data. Business Climate, Current Assessment, and Expectations surveys were all higher than the April results.
GBP/USD underperformed due to EUR/GBP demand. The pace of Euro area vaccines and expectations for a robust recovery are fueling EUR/USD demand. However, traders are cautious and fear that ECB officials will push back gains currency gains.
The Canadian dollar is in demand as some investors expect the Bank of Canada to be the first G-10 central bank to raise rates. In addition, higher commodity prices, including West Texas Intermediate oil and an improving domestic growth outlook, are weighing on prices.
U.S. Housing Starts and Consumer Confidence reports are due.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
