The Canadian dollar traded has recovered “commodity currency” status. A broad-based rise in commodity prices has led some analysts to speculate about a new commodity “super-cycle.” Canada’s wealth of raw resources is contributing to the loonie’s performance.
At the same time, the Canadian dollar is vulnerable to falling bond market prices. U.S. 10 year-year Treasury yields climbed to 1.478% overnight as traders fear rising inflation. The higher Treasury yields have widened U.S. interest differentials against other G-10 economies, fueling U.S. dollar demand.
Bond traders are concerned that U.S. inflation will spike higher because of existing and upcoming fiscal stimulus plan’s as reopening state economies unleash pent-up consumer demand. The Federal Reserve disagrees. The latest Federal Open Market Committee statement said that increases in inflation would be transitory and that high unemployment would necessitate accommodative monetary policy to “at least 2023.” A host of Fed officials have echoed that sentiment in the past few weeks.
Traders are keen to learn Fed Chair Powell’s thoughts to see if the latest spike in Treasury yields will change his outlook on the timing of the next interest rate increase.
FX markets were rangebound overnight, except for USD/JPY, which decisively took out resistance in the 107.00 area and rallied to 107.38 due to expectations of even higher Treasury yields.
Wall Street closed with hefty losses, and global equity indices followed suit.
China’s Shanghai Shenzhen CSI 300 index dropped 3.15%, while the UK FTSE 100 leads European bourses lower.
S&P 500 futures suggest a weak open in New York.
West Texas Intermediate oil prices are steady at $61.45/barrel.
Traders ignored a massive 21.56 million barrel increase in crude inventories. They are more focused on today’s meeting between the Organization of the Petroleum Exporting Countries and their Russian allies. There are rumours that the scheduled production increases will be delayed.
EUR/USD traded in a $1.2029-$1.2066 range. European Central Bank Board Member Klaas Knot said higher yields reflected an improved growth outlook.
Traders ignored his remarks and Eurozone data (January Retail Sales -5.9%, Unemployment rate 8.1%).
GBP/USD consolidated recent losses in a $1.3918-$1.3967 band. The U.K. budget was a non-event.
USD/JPY broke above 107.00 touching 107.36, as prices tracked Treasury yields.
Traders are looking for a move above 107.50 for a test of 108.30
AUD/USD traded choppily in a $0.7754-$0.7815 range, and prices are in the middle of that band in New York. Modestly weaker January Retail Sales (actual 0.5% m/m vs forecast 0.5%) were offset by steady to firm iron ore prices. NZD/USD traded in a $0.7230-$0.7270 range with prices weighed down by broad U.S. dollar demand. Reserve Bank of New Zealand Governor Adrian Orr said that monetary policy needs to remain stimulative.
Today’s U.S. data includes weekly jobless claims, which are forecast at 750,000.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians