The Canadian dollar dropped fast, hit support, and rebounded furiously. It was not alone. Most of the G-10 major currencies saw similar price action, which occurred following yesterday’s U.S. Federal Open Market Committee meeting.
The Fed left interest rates unchanged. It wasn’t a surprise. The dot-plot interest rate forecast predicted rates would remain at current levels until sometime after 2023. Analysts took note of the change in guidance in the FOMC statement.
It used to say "the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 0-1/4%. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2% objective."
It now says, "The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%.”
It wasn’t that big of a change, especially since Powell said it would happen at his Jackson Hole speech August 27.
FX traders reacted more to the Fed’s upgraded growth, employment and inflation forecasts and bought U.S. dollars. Equity traders keyed in on the following: "The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."
Asia equity indexes closed with losses. European bourses are down but off their worst levels while U.S. equity futures point to a negative open on Wall Street.
The Bank of England left monetary policy unchanged which was expected. The BoC said they were briefed on how negative interest rates would be introduced which spooked traders. GBP/USD dropped from $1.2980 to $1.2880 in a flash.
EURUSD broke key support at $1.1760 and dropped to $1.1738 on stop-loss selling. Prices rebounded to $1.1800, leaving the $1.1700-1.1900 range intact. Eurozone inflation was -0.2% in August.
The Bank of Japan left its monetary policy unchanged but upgraded economic growth factors. USD/JPY dropped from 105.16 to 104.54 as equity markets fell.
AUD/USD didn’t get any lasting benefit from better than expected employment data. Australia employment gains surged 111,000 in august. The forecast was for a loss of 35,000 jobs. AUD/USD rallied on the news but the focus quickly shifted to broad U.S. dollar strength.
The Canadian dollar is at the mercy of U.S. dollar sentiment and domestic data is ignored. USD/CAD traded down to $1.3172 in early Toronto trading following a bounce in EUR/USD to $1.1807.
Today’s U.S. data includes weekly jobless claims and the Philadelphia Fed Manufacturing Index.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
