The Canadian dollar selloff ended abruptly overnight. The domestic currency jumped aboard the commodity currency rally wagon, as FX risk sentiment turned positive. The U.S. dollar opened in Toronto broadly weaker against the major G-10 currencies, led by a 0.72% gain in the Australian dollar.
The Bank of Canada Business Outlook Survey released yesterday was modestly upbeat. It noted "firms pointed to a continued recovery supported by strengthening domestic and foreign demand, particularly in goods-producing sectors. Still, firms expect the recovery to be uneven; in particular, businesses that have been hit hard by the pandemic anticipate challenging times ahead." The Business Outlook Survey Indicator turned slightly positive.
However, the report was dismissed by traders. The survey took place in mid-November to early December, preceding the latest outbreak of COVID-19 cases and subsequent lockdown measures.
The FX focus is on the U.S. political drama, and the surge in U.S. Treasury yields. Joe Biden’s election victory, combined with Democrats gaining control of the House of Representatives and the Senate, allows the incoming administration to deliver on its massive fiscal stimulus program. Biden is demanding trillions of dollars in immediate fiscal support and is expected to release his proposals on Thursday.
Expectations for the massive spending plan have driven US 10-year Treasury yields from 0.918% the day before the Georgia Senate run-off vote to 1.173% today.
GBP/USD rocketed, rising from $1.3506 to $1.3605. The rally started with GBP/USD demand in anticipation that a global economic rebound increases U.K. investment. Prices accelerated when Bank of England Governor Andrew Bailey appeared to discount the possibility of negative U.K. interest rates. He admitted that the economy was in a difficult position but said "there are many issues with negative rates. No country has used negative rates in the retail end of the financial market."
EUR/USD consolidated recent losses in a $1.2140-$1.2178 range and is trading the overnight low. The single currency continues to be undermined by the unwind of long EUR/USD positions. The U.S. Treasury yield gains which widened U.S. and Eurozone interest rate differentials are also weighing on the currency pair.
The Canadian dollar is caught between demand because of hopes for a global economic rebound, and selling pressure due to Canada/U.S. interest rate differentials. The Canadian dollar will get a bit of support from the recent surge in crude oil prices, and positive risk sentiment.
The only data on tap today is U.S. JOLTS, and it will not be a factor for traders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
