The Canadian dollar is tracking broad U.S. dollar moves closely while getting a bit of a lift from steady to firm crude oil prices. USD/CAD traders are not interested in domestic economic fundamentals. Instead, it is the U.S. outlook that matters.
There has been a lot of chatter about the "reflation trade" recently.
The premise is that widespread COVID-19 vaccinations, combined with U.S. President Biden’s $$1.9-trillion stimulus program would spark an economic boom and a surge in inflation, forcing the Federal Reserve to raise interest rates ahead of schedule.
Fed Chair Jerome Powell pushed back against that notion yesterday, in a speech to the Economic Club of New York.
He didn’t say anything new, and repeated the common refrain echoed by many of his Federal Open Market Committee colleagues. He said "we now explicitly seek to achieve inflation that averages 2% over time. This means that following periods when inflation has been running persistently below 2% , appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time."
He also said that the Fed would not be forced to act because of full employment, saying "we will not tighten monetary policy solely in response to a strong labour market."
In a nutshell, Powell re-affirmed that U.S. interest rates wouild stay low for a prolonged period.
Nevertheless, Powell’s speech was enough to put a cap on rising U.S. Treasury yields, which led to modest US dollar selling.
FX markets were extra quiet in Asia due to the onset of the week-long, Chinese New Year holiday. AUD/USD and NZD/USD recovered yesterday’s losses overnight, underpinned by broad U.S. dollar weakness. AUD/USD got an added lift after the Treasury secretary said the economic recovery was more substantial than expected.
EUR/USD traded sideways in a $1.2115-$.2135 range. Prices remained bid despite the European Union downgrading 2021 Gross Domestic Product growth to 3.8% from 4.2%., blaming the pandemic for the change.
Germany will extend lockdown measures until March 7. EUR/USD technicals are bullish above 1.2070.
USD/CAD technicals are negative while prices are below $1.2730. Traders are looking for a decisive break below the $1.2630-$1.2660 support zone to extend losses to $1.2550.
U.S. weekly jobless claims are expected at 757,000.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
