The Canadian dollar sank yesterday. Hotter-than-expected U.S. inflation sparked a wave of US dollar buying against the G-10 currencies and the loonie. June CPI sored to 5.4 y/y, well above the 4.9% expected, and sharply higher than the Fed’s “average 2.0% range.”
Many analysts quickly pooh-poohed the results, pointing to the 10.5% surge in used car prices, which accounted for more than one-third of the inflation increase. Other analysts were not as dismissive. They note that U.S. inflation is 7.3% higher than it was six months ago and that enough other categories sustained gains which question the "transitory" conclusion.
The results intensified the scrutiny on Federal Reserve Chair Jerome Powell’s Congressional testimony that begins at noon. Most pundits believe that the Fed Chair will downplay the Consumer Price Index data and stress the need for an accommodative monetary policy.
The spotlight shines on Bank of Canada (BoC) Governor Tiff Macklem at 10 a.m, when the BoC monetary policy statement and quarterly Monetary Policy Report (MPR) are released. The BoC will leave interest rates unchanged but is expected to announce that Quantitative Easing (QE) purchases will be trimmed from $3.0 billion per week to $2.0 billion. The MPR is expected to upgrade inflation forecasts and deliver an upbeat message.
The New Zealand dollar is the best performing major G-10 currency since yesterday’s NY open. NZD/USD gained 0.37%, while the other majors lost value. That’s because of a surprisingly hawkish tilt by the Reserve Bank of New Zealand. Policymakers dispensed with the idea of tapering QE purchases and decided to cut them off altogether, effective July 23.
The statement said "The Committee noted staff advice that while the Large Scale Asset Purchase (LSAP) programme has been an effective policy instrument to-date, market conditions and functioning have improved substantially since the programme’s inception.
"The Committee agreed that further asset purchases under the LSAP programme were no longer necessary for monetary policy purposes and directed staff to halt purchases by 23 July 2021.”
EURUSD tested support in the $1.1770 area yesterday and again overnight. It held, but subsequent bounces are of the "dead cat" variety. The European Central Bank is expected to reaffirm its dovish monetary policy outlook next week, while traders are concerned that the Fed may be drifting towards a more hawkish stance.
FX markets are biding their time until Powell’s testimony today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
