The Canadian dollar was collateral damage as Wall Street equity indexes plunged. USD/CAD traded at $1.2690 in Asia yesterday and hit $1.2880 in Europe today, for a gain of 1.5%. the other commodity bloc currencies suffered a similar fate, as short-dollar positions were squeezed, and stop-losses triggered.
The stock market meltdown was the culmination of many factors. Many analysts were warning that equity markets were at, or near "bubble territory" using a rally in GameStop Corp shares as evidence. That company saw its shares soar 135% yesterday alone. They were $19.95 on January 13.
That wasn’t all. Traders were concerned about mutant strains of the COVID-19 virus and an uneven rollout of vaccinations in the U.S. and elsewhere. In Europe, European Union President Christine Lagarde threatened to block shipments of AstraZenca vaccines to destinations outside of the EU.
European politics played a role. Italian Prime Minister Giuseppe Conte resigned after another party pulled support over how EU Relief funds would be spent, which opened the door to the possibility of far-right, anti-EU candidates making inroads.
Markets were ripe for a correction. The U.S. dollar had been aggressively sold due to expectations of a vaccine-fueled global economic rebound. That rebound may occur, but just a tad later than originally expected. If so, it makes sense to suggest that U.S. dollar sellers will re-emerge in the coming days.
Yesterday’s meeting of the U.S. Federal Reserve lived up to expectations. The Federal Open Market Committee left interest rates and monetary policy unchanged with Fed Chair Jerome Powell pushing back on market talk that Quantitative Easing bond purchases will be decreased. He said "It is premature. We need to see substantial, sustained improvement' in economic growth.
EUR/USD bounced in a $1.2082-$1.2117 range on the back of broad U.S. dollar demand. EUR/USD sellers got another assist from another ECB Governing council member. Finland Central Bank Governor Ollie Rehn echoed Dutch Central Bank Governor Klaas Knot’s comments yesterday. He "We are closely monitoring developments in the exchange rate, especially regarding the inflation outlook." There is starting to be a pattern. Eurozone Consumer Confidence, Industrial Confidence, Sentiment and Business Climate reports were ignored.
U.S. Q4 Gross Domestic Product data is expected to be 2.4% following the 3.7% Q3 result. Better-than-expected data may spark renewed risk-on sentiment and give the Canadian dollar a lift.
