- Germany falls into technical recession.
- Fitch puts US AAA debt rating on negative watch.
- US dollar grinding higher on risk aversion.
USDCAD snapshot: open 1.3594-98, overnight range 1.3590-1.3611, close 1.3595, WTI $73.05, Gold $1960.98
The Canadian dollar is fading, albeit somewhat reluctantly when compared to the other commodity currencies. Nevertheless, the Loonie is trading at levels last seen at the beginning of the month.
The Canadian dollar weakness story is really a tale of US dollar strength. US Treasury yields have risen sharply in the past week, widening the CAD/US interest rate differential in favour of the US. That means yield chasing investors will flee Canadian dollar investments into US investments.
The yield chase is occurring in the other G017 nations which has lifted demand for US dollars across the board.
The Canadian dollar is also undermined by diminishing odds for US rate cuts much before December. The minutes from the May 4 FOMC monetary policy meeting showed the Committee was uncertain about the interest rate path.
Canadian dollar losses were slowed by steady to firm oil prices. West Texas Intermediate jumped to $74.70/b after the Energy Information administration reported a 12.4 million barrel decline in US crude stocks for the week ending May 19. However, fears that China’s post-pandemic economic recovery is fading helped to limit gains.
The minutes reiterated that inflation was still too high and that the jobs market was still too tight. Some members argued that rates should be left unchanged to give the previous rate hikes time to work through the economy.
Others, like Governor Christopher Walker believe it is too soon to pause. He said "I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2% objective. But whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks."
EURUSD traded in a 1.0715-1.0756 range with prices weighed down by confirmation that Germany fell into recession in Q1 2023.
GBPUSD drifted in a 1.2334-1.2386 band. The downside is supported by expectations of further rate hikes following yesterday’s higher-than-expected UK inflation report.
USDJPY climbed to 139.70 from 138.83 to 139.70, fueled by higher US Treasury yields.
AUDUSD traded negatively in a 0.6528-0.6546 range due to broad US dollar strength and fears of slowing Chinese economic growth.
Today’s US data includes Weekly US jobless claims, Chicago Fed National Activity Index, GDP, Pending Home Sales, and Personal Consumption Expenditure Prices.
