The Canadian dollar soared overnight. It had a lot of company. Traders embraced the outlook for a very robust global economic recovery occurring in a low interest rate environment. The U.S. dollar sank, global equity markets climbed, commodity prices rose, while U.S. 10-year Treasury yields stagnated around 1.64%.
U.S. Federal Reserve officials continue to push back against concerns that they will be forced to raise interest rates ahead of schedule due to rising inflation.
Yesterday, Atlanta Fed President Raphael Bostic repeated the Fed mantra that monetary policy needs to stay accommodative because "We are still eight million jobs short of where we were pre-pandemic. Until we make substantial progress to close that gap, I think we’ve got to have our policies in a very strongly accommodative situation or stance." He added, "now is not the time where we have to consider moving."
Richmond Fed President Thomas Barkin said that higher inflation partly reflected pent up demand but that long term disinflationary forces would help curb inflation expectations.
Those comments and a slew of similar statements from other FOMC members seem to have convinced market participants that the Fed will ignore inflation spikes and not raise interest rates, giving the green light to rally stocks.
EUR/USD rallied from $1.2152 to $1.2253 in a flurry of "risk-on" demand. Prices broke above resistance at $1.2180 and are now looking to break above $1.2250 to extend gains to $1.2360. EUR/USD got an added lift because the Eurozone and U.S. real-inflation differential favours the euro. European Central Bank President Christine Lagarde speaks later today and may provide some verbal intervention as a rising EUR/USD may slow the Eurozone recovery.
GBP/USD climbed steadily overnight and got an added lift from the employment report. U.K. unemployment fell to 4.8% in the three months ending in March, down from 4.9% and 0.3% better than the previous quarter. However, analysts caution reading too much into the report as the furlough scheme has skewed the results. GBP/USD traders are looking for a break above $1.4250 to extend gains to $1.4330.
USD/JPY slipped to 108.86 from 109.28 due to widespread U.S. dollar selling and soft treasury yields. Japan Q1 Grpss Domestic Product was worse than expected due to the impact of COVID-19 restrictions.
AUDUSD rallied from $0.7765 to $0.7812 due to higher commodity prices and improved risk sentiment. The minutes from the May 4 Reserve Bank of Australia monetary policy meeting did not have any impact on FX.
The Canadian economic data calendar is empty. U.S. data includes Building Permits and Housing Starts.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
