The Canadian dollar tested resistance overnight, but it held.
USD/CAD dropped from $1.2619 at Friday’s close to $1.2582 in early Asia trading, following the lead of the antipodean currencies, which were making new 2021 highs. Profit-takers emerged when USD/CAD support failed to break, and the currency pair rallied to $1.2652 in Europe. The rally coincided with a jump in 10-year Treasury yields to just below 1.40%
Analysts are divided over the direction of the Canadian dollar from current levels. Some believe additional Canadian dollar gains are limited due to the COVID-19 vaccination gap between the U.S. and Canada. The U.S. is expected to achieve coronavirus "herd immunity" in April, while Canada may not approach that level until late in Q4 2021. If so, the Bank of Canada would be hard-pressed to match any inflation-driven U.S. interest rate increases (if they occur) to avoid undermining a domestic economic recovery.
Are U.S. interest rates going higher? Bond traders certainly think so, which is why U.S. 10-year Treasury yields have risen from 1.09% to nearly 1.40% in three weeks. They believe that President Biden’s $1.9-trillion stimulus plan, combined with the previously announced stimulus measures, is inflationary and will force the Federal Reserve to raise rates.
Fed Chair Jerome Powell disagrees. He (and many of his colleagues) believe any inflation increase will be temporary. Powell believes the U.S. employment situation is worse than the data suggests and still requires ample monetary policy support.
Markets will get more clarity on the issue on Tuesday when Powell testifies before Congress.
Australia and New Zealand received votes of confidence from S&P ratings. Australia’s sovereign debt was reaffirmed at AAA while New Zealand’s debt rating was upgraded to AA+ stable outlook. Both currency pairs posted new 2021 record highs, supported by firm commodity prices.
EUR/USD sank than soared in a lively overnight session. The single currency bottomed out at $1.2092 then rallied to $1.2144 after German IFO Survey data was better than expected for February. The survey noted "The German economy is proving robust despite the lockdown, especially thanks to strength in industry."
GBP/USD traded with a bid tone in a $1.3982-$1.4051 range. U.K. economic outperformance vs the E.U. continues to underpin prices.
The Canadian and U.S. economic calendars are empty.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
