The Canadian dollar was soaring yesterday morning until a surge in U.S. Treasury yields knocked it back to earth. USD/CAD touched $1.2612 Tuesday, then sharply reversed course and climbed to $1.2700 at the same time as 10-year U.S. Treasury yields were trading at 1.30%.
Treasury traders disagree with the U.S. Federal Reserve's assertion that it will not increase interest rates because of rising inflation rates. The Fed has gone to great lengths to maintain control of the narrative. Last August, it modified its inflation mandate from a fixed 2% target to a fluid inflation range around 2%. That meant it did not need to react if inflation reached its target level.
More recently, the Fed has said it does not believe the current employment data is a true reflection of the American employment situation. Fed Chair Jerome Powell and others think the unemployment level is closer to 10%.
The Fed’s inflation level tweak and its concerns about the employment level provide it with justification for allowing the economy to run "hot" which is what it is planning.
The minutes of the January 27 Federal Open Market Committee meeting are being released this afternoon.
The FOMC monetary policy statement didn’t offer any surprises, so the minutes will likely have a similar result.
U.S. January Retail Sales are forecast to rise 1.0%. The numbers could be higher because of weak December results (-0.7% m/m).
Canadian dollar traders will be awaiting Canadian inflation numbers. Canada Consumer Price Index is expected at 0.4% m/m (December -0.2%) and 0.8% y/y.
The Canadian dollar is getting support from steady to firm oil prices.
The massive winter storm that engulfed a large part of the US also knocked out one-third of the U.S. oil production, which lifted WTI oil to $61.23/barrel.
EUR/USD broke above key resistance in the $1.2150-$1.2160 area yesterday and then tumbled when U.S. 10-year Treasury yields soared.
Prices dropped to $1.2058 in New York trading. Selling of EUR/GBP weighed on prices as the U.K.’s COVID-19 vaccination program seriously out-paced that of the European Union. Nevertheless, EUR/USD technicals are bullish above the $1.2050 area.
GBP/USD has retraced over 50% of Friday’s gains on the back of surging Treasury yields, and broad U.S. dollar strength. U.K. inflation rose 0.7% in January, as expected. U.S. Treasury yields and Wall Street price action will drive FX markets until the FOMC minutes are released.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
