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USD / CAD - Canadian dollar firm ahead of US CPI

- Traders are pricing in a lower Fed terminal rate.

- US CPI headline expected to drop to 6.0% from 6.4% in January.

- US dollar consolidating recent losses.

USDCAD snapshot open 1.3734-38, overnight range 1.3689-1.3748, close 1.3731, WTI $73.18, Gold $1901.24

The Canadian dollar traded narrowly overnight in a cautious session ahead of today’s release of US inflation data for February.

CPI is expected to fall to 6.0% y/y from 6.4% y/y in January while Core-CPI remains unchanged at 0.4% m/m. A hotter than expected CPI reading will really confuse traders.

Prior to last week, the CPI report was expected to help determine the size of the next Fed rate hike and provide a better idea of the Fed’s terminal fed funds rate.

Yesterday, US 2-year Treasury yields had the biggest one day drop since the 2008 Financial Crisis thanks to a tsunami of safe-haven demand and concerns that the Fed will soften its rate hiking policy.

Economists and analysts are quickly revising their outlooks for next Tuesday’s FOMC meeting. According to Nomura Securities, the Fed will cut rates by 25 basis points.Goldman Sachs and Barclay’s Bank are predicting the Fed will leave rates unchanged, while UBS economists think a higher than expected inflation reading today would force the Fed to hike 50 basis points.

The Canadian dollar is grinding higher on the back of broad US dollar weakness and a repricing of the US interest rate path.

Canadian bond yields fell alongside their US counterparts on Monday. The Government of Canada's 2-year yield plunged 42 basis points, and now some analysts are predicting the Bank of Canada will cut rates at its April meeting.

The USDCAD slide is getting some tracking with the break below the 1.3700–10 area, suggesting further losses to 1.3660 support. A break below that level targets further losses to 1.3500.

EURUSD traded in the 1.0680-0.0732 range, with prices supported ahead of Thursday’s ECB meeting, where a 50 bps rate hike is still expected.

GBPUSD traded narrowly in a 1.2143–1.2187 range, supported by UK employment data. The unemployment rate ticked down to 3.7% for the months ending in January, compared to 3.8% previously. Wage growth also slowed a tad, with average earnings ex-bonus at 6.5% y/y compared to 6.7% previously.

USDJPY rallied choppily, rising from 133.04 to 134.33 due to the rebound in the US 10-year Treasury from the 3.50% low in Asia to 3.60% in NY.

AUDUSD drifted in a 0.6633-0.6671. The upside was capped after Consumer and Business Confidence data was weaker than expected.