The Canadian dollar stayed inside the narrow range that contained price action since last Thursday, as it underperformed against its G-10 currency peers. Today is U.S. Federal Open Market Committee day, and markets expect a dovish result.
The Organization for Economic Cooperation and Development (OECD) upgraded its 2020 growth forecast to -4.5% from -6.0%
Fed Chair Jerome Powell may have pre-empted this meeting with his Jackson Hole speech on August 27. That is when he detailed the Fed’s plans to change their inflation focus. Powell said the central bank would adopt an Average Inflation Targeting around 2.0% policy, ending the “symmetric 2.0%” goal. He said the change was needed because “If inflation runs below 2% following economic downturns but never moves above 2% even when the economy is strong, then, over time, inflation will average less than 2%.
“Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down.” Average Inflation Targeting is designed to alter consumer’s expectations for inflation.
The FOMC releases an updated “Summary of Forecasts” which is widely expected to confirm the “low rates for longer” policy.
The U.S. dollar retreated in Asia and Europe and added to its losses in early Toronto trading. GBP/USD rallied from an Asia low of $1.2877 to $1.2977 in Toronto, on rumours that U.K. Prime Minister Boris Johnson would amend his Internal Markets Bill, and offer concessions to the European Union in fisheries. GBP/USD bulls believe the government’s hostile rhetoric and the Internal markets Bill are merely negotiation ploys to extract more favourable trade terms.
EUR/USD climbed on the back of broad U.S. dollar weakness, getting an added lift from a widening trade surplus. The non-seasonally adjusted trade balance rose to €27.9 billion in July, from €21.2 billion in June. European Central Bank (ECB) policymakers continue to make noises about “monitoring the exchange rate” which makes EUR/USD bulls a tad cautious.
USDJPY plunged to 105.00, a level last seen July 31. The currency pair is under pressure due to the dovish expectations for the Fed and lackadaisical Asia equity markets.
The antipodean currencies (AUD/USD and NZD/USD) rallied on the back of broad U.S. dollar weakness. NZD/USD got an extra boost as coronavirus restrictions were eased.
Canadian inflation is expected to rise 0.4% in August, year over year. The results will not have an impact on the Canadian dollar as low inflation is a well-documented issue.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians