The Canadian dollar continues to chop around in a well-defined $1.2000-$1.2140 range. The upside momentum in April ran out of gas in May because traders believed all the positive news was priced into the currency.
Nevertheless, the positive news continues to fuel expectations for further Canadian dollar gains. Canada’s second-dose vaccine roll-out is getting traction which reinforces calls for a robust second half economic boom. The evidence is in the latest Gross Domestic Product report, which showed the economy grew 5.6% q/q in Q1, following a 9.3% q/q jump in Q4 202,
The Canadian dollar is getting additional support from rising commodity prices. West Texas Intermediate (WTI) oil, the North American benchmark prices, came within three cents of $70.00 overnight, rising to $69.87/barrel. Oil traders expect further gains due to the Organization of the Petroleum Exporting Countries and International Energy Agency (IEA) predictions that crude demand will far outstrip supply in the second half of 2021.
Perhaps the biggest driver of Canadian dollar gains is the Bank of Canada’s mildly hawkish interest rate outlook. They brought forward the timing for the next rate hike to H2 2022, which contrasts with the Fed’s view that weak employment means US rates will remain unchanged for a considerable period.
The Canadian dollar uptrend resumed after officials with the U.S. Federal Resreve successfully pushed back against concerns that rising inflation would force them to raise interest rates sooner than expected. Friday’s weaker than expected U.S. non-farm payrolls data showed the U.S. economy was growing but no in any danger of overheating, which may have forced the Fed's hand. U.S. 10-year Treasury yields dropped from a pre-NFP peak of 1.62% to 1.58% in early New York trading.
Treasury Secretary Janet Yellen told Bloomberg News that even if interest rates rose, it wouldn’t be a bad thing. She said "We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade. We want them to go back to" a normal interest rate environment, "and if this helps a little bit to alleviate things then that’s not a bad thing -- that’s a good thing."
There are no U.S. or Canadian economic reports today, leaving the Canadian dollar direction determined by U.S. dollar and equity moves.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
