The Canadian dollar bounced off of resistance yesterday and played defence overnight. USD/CAD sellers were plentiful ahead of U.S. President-elect Joe Biden’s speech Thursday night, in part because of he promised: "trillions and trillions" of dollars in relief spending. USD/CAD tested support in the $1.2620 area but retreated into the close.
Biden announced a $1.9-trillion spending package. The juiciest details had already been leaked, and there were not any surprises. Traders unwound short U.S. dollar positions against AUD/USD, NZD/USD, and USD/CAD in particular. The greenback was also in demand due to a bout of profit-taking ahead of the long weekend in the U.S. Monday is Martin Luther King Day.
Traders were also mildly risk-averse ahead of Joe Biden’s inauguration on January 20. Last week’s invasion of the U.S. Capitol forced authorities to increase security.
The U.S. dollar rallied earlier this week on fears that the inflationary impact from Biden’s Relief spending would force the Federal Reserve to begin tapering their quantitative easing purchases, earlier than expected. Yesterday, Fed Chair Jerome Powell tried to put a stop to such speculation. He said the Fed had many tools to use to combat inflation, without the need to raise rates, saying "the time to raise rates is no time soon."
The Canadian dollar is vulnerable to additional weakness due to the latest measure imposed by some provincial governments to combat the spread of the coronavirus. Montreal has a curfew, and Ontario is in a "State of Emergency." Canada is also behind the vaccination curve. The U.K. expects to vaccinate 500,000 per day starting next week. Meanwhile, Canada is not likely to be a position to increase vaccinations until some time in April, at the earliest.
EUR/USD is undermined by COVID-19 issues, and Dutch and Italian politics. German Chancellor Angela Merkel is reportedly planning to increase lockdown measures. The Dutch government could resign because of a childcare subsidy scandal. The Italian government may face a confidence vote. However, losses were curtailed, in part because of Powell’s remarks.
U.S. Retail Sales headlines a parade of economic data that includes Michigan consumer Sentiment, Business Inventories, and Producer Prices. The data will not be a factor for FX as markets are looking ahead to the inauguration.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
