- BoC expected to raise interest rates either 50 or 100 bps
- Elevated US Treasury yields weigh on risk sentiment
- US dollar opens higher across the G-10 spectrum
USDCAD Snapshot open 1.3158-62, overnight range 1.3152-1.3204, close 1.3151, WTI oil $87.25, Gold $1706.68
The Canadian dollar is under pressure due to broad US dollar demand. The Loonie doesn’t appear to be getting any support from the upcoming Bank of Canada monetary policy meeting and expectations for a hawkish outcome.
Instead, traders only have eyes for the US interest rate outlook and economy.
The Bank of Canada is expected to announce a 75-basis point hike, although other forecasts predict either 50 bps or 100.
The argument for a 75 bp increase is compelling. Policymakers want to be seen aggressively combatting concerns that inflation expectations will become entrenched, thereby becoming a self-fulfilling prophecy. BoC officials appeared stung by accusations they bungled the inflation file, as evidenced by their August 25 Twitter question and answer.
However, some analysts point to the latest CPI reading, which was lower than expected, and forecast that the August results will be even lower due to falling oil prices. They believe the BoC wants to avoid over-tightening monetary policy and cause a recession. Those analysts are predicting a 50 bp hike.
The case for a 100-point hike assumes the BoC wants to deliver a fatal blow to domestic inflation pressures and be viewed as anti-inflation champions in hopes of making up for their prior ineptitude.
Nevertheless, the BoC actions will likely be lost in the global focus on the Fed. The US economic data shows a robust economy that can easily support higher interest rates. Yesterday’s ISM report was stronger than expected and helped lift the 10-year US Treasury yield to 3.35% from 3.208%.
Fed Chair Jerome Powell reiterated his commitment to fighting inflation in his August 25 Jackson Hole speech. He warned that US rates need to rise into restrictive territory and stay there until inflation falls toward the Fed’s 2.0% target. Several other Fed officials have echoed his words.
USDJPY rallied hard in tandem with the surge in Treasury yields rising to 144.98 in NY from 141.65 yesterday.
EURUSD is on the defensive in a 0.9878-0.9929 range, with prices weighed down by the Ukraine war and the Fed outlook.
GBPUSD is at the bottom of its 1.1418-1.1522 range, with the gains from the Liz Truss as Prime Minister announcement evaporating and the focus shifting to global risk sentiment.
AUDUSD bounced in a 0.6701-0.6737 range. Australia's GDP came in as expected, rising 0.9% q/q. NZDUSD mirrored AUDUSD moves and traded in a 0.5998-0.6042 range.
Today, US Trade data is on tap along with speeches from Richmond Fed President Thomas Barkin and Cleveland Fed Loretta Mester.
