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USD / CAD - Canadian Dollar Enters Lower Trading Band

- Talk of US rates above 4.0% for all of 2023 boosts US dollar

- China Caixin Manufacturing PMI enters contraction territory

- US dollar extends gains, but EUR outperforms

USDCAD Snapshot open 1.3167-71, overnight range 1.3131-1.3193, close 1.3134, WTI oil $88.12, Gold $1705.62

The Canadian dollar fell off a cliff yesterday and continued to fall overnight. It wasn’t alone. The Japanese yen is at a twenty-four-year low as investors chase yield and buy US dollars.

USDCAD broke above major resistance levels at 1.3020 and 1.3070, which should now contain downside moves while prices grind toward 1.3400.

The weak yen is a self-inflicted wound caused by the Bank of Japan’s ultra-dovish monetary policy.

The BoJ insists that domestic rates need to remain at -0.10% in order to stimulate the economy and help it recover from the pandemic. The BoJ actively intervenes in the bond market to prevent the 10-year Japanese Government Bond (JGB) yield from rising above 0.25% by offering to buy an unlimited amount of bonds. When you can print all the money you need, “unlimited” is infinite.

The Canadian dollar doesn’t have the yens problem; far from it. The Bank of Canada has been the most aggressive rate-hiking G-10 central bank after hiking the overnight rate by 100 bps on July 13. They will likely repeat that move on September 7 after yesterday’s Q2 GDP data suggested the economy could easily withstand higher rates.

Month-end demand for US dollars kicked off the USDCAD gains yesterday, but comments from Cleveland Fed President Loretta Mester fueled the rally.

Ms Mester said, “My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 percent by early next year and hold it there. I do not anticipate the Fed cutting the fed funds rate target next year.”

That set the cat among the pigeons.

The 10-year US Treasury yield jumped from 3.09% to 3.22% overnight. Equity traders took note and sold stocks. The action continued in Asia, where the major indexes closed with sharp losses. European bourses followed suit led by a 1.30% drop in the UK FTSE 100.

S&P 500 futures are down 0.75%, suggesting a negative open on Wall Street.

The Canadian dollar isn’t getting any help from oil prices. West Texas Intermediate dropped to $87.16/b overnight before rebounding to $88.29/b in NY. Traders are concerned about increased supply from Iran if a nuclear deal is completed as demand falters due to a recession.

The weekly US jobless claims data (forecast 248,000) are due.