The Canadian dollar is poised to end the week at a three-year peak. The currency has been volatile all week as risk sentiment bounced between positive and negative, with USD/CAD trading in a $1.2015-$1.2145 range.
Tuesday, USD/CAD dropped to $1.2015 in a move driven by rising global equity prices and the belief the Federal Reserve would remain on hold until 2023. Numerous Fed policymakers encouraged that view saying the economy requires ongoing support as 8.5 million people are still unemployed from the pandemic. Rising inflation concerns are dismissed as temporary reactions to pent-up demand.
Sentiment changed the next day, after the minutes from the April 28 Federal Open Market Committee meeting were released. The minutes said, "A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases."
Traders reacted as if the Fed started tapering. The U.S. dollar soared, and equities and commodity prices sank. The move didn’t last. It was fully reversed by the close of business yesterday.
Risk sentiment remained positive overnight. The main Asia equity indexes closed higher, except in China. European equity indexes are posting gains, although the U.K. FTSE100 is underperforming. S&P futures suggest Wall Street will open with gains. Gold and oil prices are higher compared to yesterday’s closing level, and Treasury yields are unchanged.
EUR/USD is sitting at the bottom of its $1.2211-39 range. Eurozone Purchasing Managers' Index readings were stronger than expected. Manufacturing PMI is 62.8 compared to 62.2 previously, which suggests the Eurozone economy is recovering rapidly. However, technical resistance at 1.2250 and lingering concerns the Fed may have to taper Quantitate Easing sooner than expected.
GBP/USD rallied on the back of improved consumer confidence and better than expected PMI data.
GBP/USD has a positive bias above $1.4170, looking for a break of $1.4250 to extend gains to $1.4350.
Canada March Retail Sales are expected to show a gain of 2.3% y/y in March, compared to February’s 4.8% increase. The data is stale and its impact on USD/CAD trading will likely be negligible, especially since lockdown measures and restrictions in April suggest the next month's report will be weak.
FX activity will be limited after lunch, as traders get a head start to the first long weekend of the summer.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
