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USD / CAD - Canadian Dollar extends rally

- More Fed talk and US Consumer Confidence data in focus

- Sentiment is building for soft PCE-Prices data on Friday.

- US dollar on the defensive in mildly positive risk environment.

USDCAD open 1.3626, overnight range 1.3614-1.3637, close 1.3636, WTI $78.88, Gold, $2343.90.

The Canadian dollar extended yesterday’s gains overnight and is poised to move lower today due to improved risk sentiment partly due to sharply reduced volatility in US interest rates. The US 10-year Treasury yield has been rangebound in a 4.44-4.50% band for the past week, which has improved risk sentiment, albeit just modestly. Another reason is the lack of actionable economic data until Thursday and Friday.

Today’s Canadian Industrial Product Price (forecast 0.6% vs. 0.8% in March) and Raw Materials Prices Index (forecast 3.2% vs. 4.7% in March) could underpin the Canadian dollar because the results would suggest more negative inflation pressure.

West Texas Intermediate oil prices are higher, rising from $77.69 to $79.05 due to concerns that Middle East supplies could be negatively impacted if the Hamas/Israel war escalates further. The Israelis angered Egypt after one of its soldiers was killed near Rafah. In addition, OPEC is expected to extend its existing production cuts when the cartel meets next week.

EURUSD rose to 1.0889 from 1.0854 due to renewed hopes that the Fed will ease rates sooner than expected. The CME Fedwatch tool suggests a 48% chance of a Fed rate cut in September because of recent weaker-than-expected CPI and PPI reports. That speculation is at odds with recent Fed commentary suggesting it is far too soon to ease monetary policy.

GBPUSD followed EURUSD higher, rising from 1.2761 to 1.2789. GBPUSD is supported by last week’s increase in inflation and by the UK election. The Bank of England cancelled all its engagements after Prime Minister Rishi Sunak called the election to avoid the risk of being seen to favor one party over another.

USDJPY firmed in a 156.62-157.00 range. Japan’s Corporate Service Price Index jumped to 2.8% y/y in April from 2.4% in March, supporting BoJ rate hike arguments.

AUDUSD is a touch higher, trading in a 0.6653-0.6674 range and underpinned by improved risk sentiment. Traders ignored the weaker-than-expected April Retail Sales report (actual -0.1% m/m vs. forecast 0.2%).

The Canadian Industrial Product Price is expected at 0.6% compared to 0.8% in March, while the Raw Materials Prices Index is expected at 3.2% compared to 4.7% in March.

US Case-Shiller Home Prices and Consumer Confidence reports are due.