- China/US tensions elevated
- Global stocks slide, Treasury yields plunge
- US dollar opens on mixed note
USDCAD Snapshot open 1.2853-57, overnight range 1.2762-1.2890, close 1.2880, WTI oil $93.64, Gold $1765.79
The Canadian dollar largely ignored yesterday's China/Taiwan drama, and US Treasury yield moves with USDCAD adrift in a 1.2833-1.2890 band since yesterday.
The Canadian dollar continues to be underpinned by the Bank of Canada's (BoC) aggressive inflation fighting posture, alongside relatively high oil prices.
The BoC hiked interest rates by 100 basis points on July 13, which surprised the market. It shouldn't have. Governor Tiff Macklem and the Governing Council misread the inflation outlook since prices started to rise a year ago. They were happy to co-opt the US Federal Reserve view that inflation was transitory.
They changed their tune after inflation remained stubbornly above target and showed no signs of being transitory. They hiked rates by 0.50% in March, April, and June, but inflation continued to rise. They hiked 100 bps on July 13 and left the door wide open to a similar move in September.
The BoC acknowledged that Canada's inflation problem was due to a lot of external factors, including the war in Ukraine and the lingering impact of supply chain disruptions from the pandemic.
The BoC also believes they can engineer a "soft landing" because of the job market's strength.
Elsewhere, the US dollar traded choppily due to shifting risk sentiment. China is looking rather foolish after threats of "forceful measures," and sending fighter jets into Taiwan airspace because a US politician visited Taiwan, proved to be all bark and no bite.
Traders also changed their minds about the so-called "Fed Pivot." Late last week, analysts decided the Fed would start cutting interest rates as early as January 2023. A gaggle of Fed policymakers stepped all over that notion yesterday.
Cleveland Fed President Loretta Mester said she didn't see any evidence that inflation was falling, while Chicago Fed President Charles Evans speculated on a 75 bp rate hike in September.
Those comments drove the 10-year Treasury yield from 2.517% on Monday to 2.77% today.
EURUSD traded in a 1.0151-1.0210 range, getting some support from better than expected German and eurozone data.
GBPUSD bounced in a 1.2136-1.2207 band, with gains capped when the National Institute of Economics and Social Research (NIESR) warned that UK inflation would soar to "astronomical levels" over the next year.
Today's US data includes Factory orders and the ISM Services PMI report for July.
