- Canadian dollar rising with broad US dollar weakness
- Risk sentiment improves after US CPI data
- US dollar consolidates yesterday’s losses
USDCAD snapshot open 1.3340-44, overnight range 1.3324-1.3395, close 1.3369, WTI $79.19, Gold $1906.12
The Canadian dollar dropped yesterday in the wake of the US inflation data for December. Headline CPI rose 6.5% y/y compared to 7.1% in November while Core-CPI rose 5.7% y/y vs 6.0%. Both results were exactly as predicted.
The knee-jerk reaction to the results was to buy US dollars, and sell stocks, but that was only because traders unwound positions after being positioned for a much stronger result. The reaction was short-lived and by the end of the day, the US dollar was sharply lower against the G-10 majors, the S&P 500 closed with a 0.34% gain and the US 10-year Treasury yield dropped to 3.445%.
Bond traders are convinced that the Fed’s economic outlook is not just wrong, but that US interest rates will not need to rise as high or for as long as projected in the Summary of Economic Projections.
Fed Chair Jerome Powell is on record on requiring evidence that inflation is falling over a longer time frame before considering a pivot. One nonfarm payrolls and one CPI report do not constitute a “longer-time.”
Bond traders disagree and voted with their wallets. The US 10-year Treasury yield has dropped from 3.885% at year end to 3.45% this morning.
The Canadian dollar rallied on the back of broad US dollar weakness and in part because the Fed and Bank of Canada may be equally dovish.
Oil prices are also contributing to Canadian dollar gains. West Texas Intermediate (WTI) climbed to $79.25/b overnight from a session low of $78.00/b. Oil prices are firming on hopes of increased demand from China even as Opec curtails production and western sanctions on Russian crude dampen supply.
EURUSD traded in a 1.0804-1.0815 range with the bottom seen in NY after S&P futures fell 0.87%. The impact from better-than-expected Euro area Industrial Production (actual 1.0% m/m in November) has faded.
GBPUSD is at the bottom of its 1.2169-1.2248 range. The currency pair has given back all the gains after GDP rose 1.0% m/m in November which beat the forecast of a -0.1% m/m decline.
USDJPY fell 3.3% since last Friday and traded choppily in a 128.12-129.43 range overnight. Prices are under pressure to expectations for hawkish tweaks to monetary policy at next week’s BoJ meeting.
AUDUSD drifted in a 0.6946-0.6993 range, underpinned by improved risk sentiment.
Today’s US data includes Michigan Consumer Sentiment, expected to rise to 60.5 in January from 59.7 in December.
