The Canadian dollar soared yesterday afternoon. The U.S. Federal Open Market Committee left interest rates unchanged and issued a dovish monetary policy statement. That was followed by a press conference with Fed Chair Jerome Powell who said that cross-currents and soft inflation meant that Fed could take a breather from hiking rates.
The FOMC statement repeated the December line that read: "On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2%." Then they added this qualifier: "Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed." That triggered the initial selloff in the U.S. dollar. Powell kicked off the second leg of selling during his press conference when he blamed "cross-currents" for the Fed’s caution.
The Canadian dollar rallied over a cent yesterday afternoon and then spent the overnight session consolidation those gains in a narrow range. It wasn’t alone. All the G-10 majors recorded healthy gains against the greenback.
The Japanese yen was a big beneficiary of the dovish FOMC outlook. USD/JPY plummeted from 109.72 to 108.53 which is where is sitting in early Toronto trading. A steep drop in U.S. Treasury yields fueled USD/JPY selling.
The FOMC was the major risk event for FX markets yesterday, but it wasn’t the only one. Traders were dealing with the fallout from the U.K. vote on amendments to Prime Minister Theresa May’s Brexit plan. The decision to pass a non-binding bill to avoid a "no-deal" Brexit gave GBP/USD a boost. However, the decision to tell May to renegotiate the Ireland backstop agreement with the E.U. was given the cold shoulder by senior E.U. officials. GBP/USD traders view the snub as merely the opening salvo in new talks because the E.U. is just as motivated as the U.K. to avoid a disruptive, acrimonious "no-deal" Brexit.
EUR/USD rallied after the FOMC as well although buying enthusiasm was tempered by somewhat soft euro-zone data overnight. Last week’s economic slowdown concerns expressed by European Central Bank President Mario Draghi also helped to cap gains.
The Canadian dollar received a bit of a boost from a surge in oil prices. West Texas Intermediate (WTI) rallied to $54.87/barrel from $53.05/b yesterday, getting ongoing support from the new US sanctions against Venezuela.
The Canadian dollar is in for a bouncy ride today. Canada November GDP is expected to have dropped 0.1% from a 0.3% increase in October. Some of the weakness will be due to the postal strike. Canadian dollar weakness following this report may be capped by expectations of demand because of portfolio re-balancing needs.
The U.S. calendar as weekly Jobless Claims, Chicago Purchasing Manager Index and New Home Sales.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
