The Canadian dollar added to yesterday’s gains in Asia but retraced the move during the European session. The Canadian dollar gains followed on the heels of a letter by Bank of Canada Governor Tiff Macklem published in the U.K. Financial Times.
He hinted that domestic rates might rise sooner than expected, saying, "For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer.
Macklem also appeared to waver in his belief about the transitory nature of Canadian inflation when he wrote, "if we end up being wrong about the persistence of inflationary pressures and how much slack remains in the economy, we will adjust."
USD/CAD extended Monday’s losses in Asia, dropping to $1.2495 in concert with Australian and New Zealand dollar gains. Those currencies were bolstered by a positive tone to risk sentiment in part because of the non-confrontational end to President Biden and China President Xi Jinping's virtual summit.
Biden and Xi avoided the inflammatory language that characterized most Trump meetings, suggesting a de-escalation of tensions between the nations.
Global equity indexes are modestly higher, with a forecast by Goldman Sachs predicting the S&P 500 would reach 5,100 by the end of 2022, helping sentiment.
U.S. Retail Sales data may be a flashpoint for markets. Analysts expect a 1.2% m/m gain in October, compared to 0.7% in September due to higher energy prices and auto sales. Tin addition, lower numbers of delta-variant coronavirus cases in October compared to September may have exacerbated demand.
There is a risk that a higher-than-expected result will force the Federal Reserve to raise rates earlier than expected, while weak data supports Fed Chair Jerome Powell’s view that rates need to remain low.
EUR/USD crashed through support at $1.1500 yesterday. European Central Bank President Christine Lagarde reiterated her dovish outlook and suggested the ECB would leave monetary policy and interest rates unchanged until 2023. The risk of higher U.S. interest rates and low ECB rates fueled renewed EUR/USD selling.
GBP/USD rallied to $1.3472 from $1.3407 after better than expected U.K. employment data. The U.K. unemployment rate dropped to 5.1% from 5.2% which analysts believe was the last bit of data the Bank of England needed to see before raising interest rates.
The only Canadian economic data due today is housing starts, which will not be a factor for FX traders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
