The Canadian dollar soared and sank yesterday, all the while remaining in its well-defined trading band. USD/CAD dropped from $1.2114 ahead of the Bank of Canada statement to $1.2057 immediately afterwards, then retraced the entire move by the start of the afternoon. Prices bounced between $1.2107 and $1.2123 with traders shifting their focus to this morning’s U.S. inflation report.
There were not any surprises contained in the relatively upbeat Bank of Canada statement. The BoC left interest rates unchanged at 0.25% and kept Quantitative Easing (QE) purchases at $3.0 billion per week. The statement noted "first quarter G(ross) D(omestic) P(roduct) growth came in at a robust 5.6 per cent,” which it attributed to rising confidence and resilient demand.
The BoC noted that "As expected, C(onsume) P(rice) I(ndex) inflation has risen to around the top of the 1-3 percent inflation-control range,” but dismissed the increase, saying it was due to base year effects and higher gasoline prices.
The highly anticipated U.S. May CPI data is released today. Headline CPI is expected to rise 4.7% y/y (April 4.2%), and Core CPI is forecast at 3.4% (3.0%). The knee-jerk reaction to higher than expected numbers will be to buy U.S. dollars. Anticipation of such a result is also why the greenback opened in New York with gains across the board, compared to Wednesday's open.
FX traders may believe a higher inflation reading is U.S. dollar bullish as it suggests the Federal Reserve will be forced to raise interest rates sooner than expected. Bond traders clearly disagree. U.S. 10-year Treasury yields were 1.562% on Monday, and they hit 1.477% overnight.
Prices have inched higher to 1.50% in early New York. Even so, yields are at levels that clearly indicate traders have swallowed the dovish Fed message, hook, line, and sinker.
EUR/USD traded quietly in a $1.2155-80 band. There is a bit of a debate about the size of the Pandemic Emergency Purchase Plan (PEPP). Camp A believes the latest Eurozone data suggests policymakers will scale back purchases. Camp B dismisses that notion as it would represent a flip-flop to the European Central Bank stance in March when they committed to "significantly higher" purchases. Camp B is probably right.
WTI oil prices dropped from $70.60 to $69.50 yesterday as positions were adjusted ahead of today’s U.S. CPI. Traders ignored the EIA report that crude inventories fell 5.2 million barrels in the week ending June 4. That changed overnight, and prices climbed to $70.01 in New York.
U.S. CPI may be the headliner, but weekly jobless claims data shares the stage. At 1:00 pm ET, Bank of Canada Deputy Governor Timothy Lane speaks about "the digital transformation and Canada’s economic resilience.
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Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
