The Canadian dollar had its ups and downs yesterday around the U.S. Federal Open Market Committee statement and Fed Chair Jerome Powell’s press conference. It finally sorted out a direction in Asia with the Canadian dollar sinking steadily to open in New York at the overnight low.
Choppy oil prices played a significant role in Canadian dollar direction. West Texas Intermediate (WTI) fell 4.0% Wednesday after the U.S. Energy Information Administration reported a steep rise in U.S. crude inventories (3.29 million barrels) for the week ending October 29. Even worse, reports of sharply rising coronavirus cases in China renewed fears of another slump in oil demand. That fear is one of the main reasons why the Organization of the Petroleum Exporting Countries will ignore President Biden’s call to raise production by 600,000-800,000 barrels per day, when it meets today.
The FOMC did not surprise anyone when it announced it would begin tapering Quantitative Easing (QE) purchases by $15.0 billion per month. That move had been well-telegraphed.
Powell seemed a tad less confident in his inflation outlook. He admitted that inflation is elevated but claimed most of the increases are due to supply chain issues, which will be resolved.
Powell danced around a question asking if markets that expect a rate hike in the middle of 2022 are wrong. He said that Wednesday’s meeting was about inflation and not raising interest rates. He added it was not time to raise rates because the unemployment rate does not accurately reflect the employment picture.
At the same time, he did not explicitly deny that a 2022 rate increase was a possibility.
U.S. dollar losses immediately following Powell’s press conference were fully recouped overnight.
EUR/USD peaked at $1.1616 following the FOMC meeting and dropped to $1.1544 in early NY trading. The single currency suffers from the dovish European Central Bank outlook and yesterday’s comments by ECB President Christine Lagarde suggesting interest rates will be unchanged in 2022. Her view contrasts with the U.S. outlook, where interest rates are expected to rise by mid-year.
Traders ignored unchanged Services Purchasing Managers Index data and German Factory orders, which rebounded 1.3% in September compared to the 7.7% decline in August.
GBP/USD traded in a $1.3618-$1.3697 range overnight. Prices are weighed down by broad U.S. dollar strength and a possible 0.15% interest rate increase announcement by the Bank of England at today’s meeting.
USD/JPY rallied in Asia, rising from 113.88 to 114.27 then retraced the entire move in Europe. Gains appear to be limited while 10-year Treasury yields stay below 1.60%.
AUD/USD and NZD/USD failed to hang on to post-FOMC gains, and prices retreated to yesterday’s lows. Both currency pairs are suffering from renewed COVID-19 outbreaks, especially in China.
The key U.S. economic reports are the September Trade balance and weekly jobless claims (forecast 277,000 compared to 281,000 last week).
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
