The Canadian dollar traded sideways as FX traders were cautious ahead of Wednesday’s Federal Open Market Committee meeting. The domestic currency is on a roll thanks to firm oil prices and collateral benefits from the U.S. $1.9-trillion stimulus package.
FX markets were cautiously optimistic overnight, in part due to buoyant global stock markets, firm commodity prices and expectations of a dovish FOMC outlook. The Fed is expected to look past the spike in inflation which is caused by “base effects”, meaning inflation was extremely low due to the pandemic. The Fed will continue to dwell on employment concerns as Fed Chair Jerome Powell’s believes the unemployment data does not accurately reflect the true level of unemployment.
Another key focus is if the Fed addresses the Supplemental Leverage Ratio (SLR). Briefly, the SLR is a measure of capital adequacy used by the Fed to measure, in percentage terms, a bank’s ability to take losses on its assets.
At the height of the pandemic last year, the Fed announced it would temporarily exclude U.S. Treasuries and bank deposits with the Fed from the calculation. Fed members believed it allow the banks to boost lending during the pandemic. The program ends March 24.
There are many issues around SLR that are complicated. However, some analysts fear that ending the program will force traders to sell Treasuries and drive up interest rates.
EUR/USD caught a bit of a bid after German ZEW data was better than expected. Economic sentiment rose 5.4 points to a new reading of 76.6 points compared to February. Expectations for a dovish FOMC are also underpinning prices, which rose from 1.1915 to 1.1950 in New York.
GBP/USD dropped from $1.3902 to $1.3810, on the lingering fallout from BoE Governor Andrew Bailey’s dovish comments yesterday.
AUD/USD dropped to $0.7712 from $0.7754 after the Reserve Bank of Australia minutes, which were considered more dovish than expected.
There are plenty of U.S. economic reports, but the looming FOMC meeting suggests the data will be ignored. February Retail Sales are expected to fall 0.5% due to the impact of the major Texas storm. Industrial Production will rise 0.6%, a tad softer than the 0.9% in January, while capacity utilization will remain unchanged.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians