The Canadian dollar continues to see-saw inside a USD/CAD range of $1.3020-$1.3090. It has tested both sides of that band in the past few days but was unable to break out. The currency is supported by monetary policy divergence between the U.S. Federal Reserve and the Bank of Canada. The BoC is neutral. Governor Stephen Poloz said the economy was performing as expected but was cognizant of downside risks.
Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) signaled that U.S. interest rates would be cut by 0.25% at the July 31 meeting. The FOMC’s dot-plot interest rate forecast projected two rate cuts in 2019. Yesterday, New York Fed President James Bullard appeared to suggest that a 0.50% rate cut was warranted at the next meeting.
Bullard disputed the notion that it was necessary to keep rates elevated in order that they could be slashed in the event of a crisis. He advocated acting quickly at the first sign of economic distress. He said "It’s better to take preventative measures than to wait for disaster to unfold.”
FX markets took Bullard’s remarks to heart. The U.S. dollar was sold against all the G-10 majors in anticipation of a deeper rate cut than expected. The odds of a 0.50% rate cut at month-end rose to 45.2% from 38.6%.
U.S. Treasury yields sank, and USD/JPY plunged, falling from 107.98 yesterday morning to 107.23 where it opened in Asia. EUR/USD soared to 1.1280 from 1.1206 during the same period. The Canadian dollar rallied as well.
Apparently, financial markets misunderstood Bullard’s comments. A spokesman for the New York Fed said Bullard’s remarks did not have anything to do with the upcoming FOMC meeting. Instead, "this was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting."
The bulk of the U.S. dollar selloff was unwound in Asia and Europe overnight.
Risk aversion sentiment rose yesterday and overnight. President Trump confirmed that the U.S. Navy ship Boxer shot an Iranian drone out of the sky. Trump said “The Boxer took defensive action against an Iranian drone, which had closed into a very, very near distance – approximately 1,000 yards – ignoring multiple calls to stand down and was threatening the safety of the ship and the ship’s crew. The drone was immediately destroyed. This is the latest of many provocative and hostile actions by Iran against vessels operating in international waters."
Iran’s deputy foreign minister denied that it was an Iranian drone.
The Canadian dollar opened the Toronto trading session in the middle of its recent range. Traders are awaiting today’s Canadian May Retail Sales data. The Michigan Consumer sentiment Index is the only U.S. data on tap.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
