U.S. Federal Reserve Chair Jerome Powell did not tell the market what it wanted to hear, and things got messy. U.S. treasury yields climbed steadily for the past month as bond traders decided that the $1.9-trillion stimulus plan proposed by President Joe Biden would trigger a spike in inflation and force the Fed to raise interest rates in response.
Traders expected the Fed Chair to suggest some measures the Fed would implement to combat higher interest rates. He didn’t. Instead, he repeated that the Fed would maintain its easy monetary policies until it can fulfil its twin mandates of maximum employment and inflation averaging 2.0%. He said, "today, we are a long way from that goal."
The bond market was not impressed. 10-year Treasury yields climbed to 1.52% from 1.45% before his speech. The U.S. dollar soared against the major G-10 currencies, and the Canadian dollar suffered.
The Canadian dollar losses would have been worse if not for the surge in crude oil prices. West Texas Intermediate soared from $60.50 U.S. yesterday to $65.63 after the Organization of the Petroleum Exporting Countries (OPEC) and Russia-million barrel/day cut as well.
Canadian producers announced 500,000-barrel production cuts as well. Those cuts were not in solidarity with OPEC but for maintenance reasons.
USD/CAD climbed from $1.2653 to $1.2722 in early Toronto trading supported by bullish intraday technicals. However, high oil prices and the long-term downtrend line at $1.2750 may limit gains today.
Traders are looking ahead to the U.S. employment report. Non-farm payrolls are expected to show an increase of 182,000 jobs in February. The impact from the data may be limited as traders focus on Treasury yields and Wall Street.
Overnight, EUR/USD broke support at $1.2020 after Powell’s remarks, and the level hasn’t been seen since. The single currency traded in a $1.1916-$1.1976 range overnight. Selling pressure stemmed from the unwinding of stale long EUR/USD positions and bearish technicals.
Widening yield differentials between U.S. Treasuries and Bunds is also undermining the currency pair.
GBP/USD plunged from $1.3905 to $1.3793 due to widespread US dollar demand and the flushing out of stale long GBP/USD positions. The short term technicals are bearish, looking for a test of support in the $1.3720 zone.
Canada Merchandise Trade and Ivey Purchasing Managers Index data are due today.
