The Canadian dollar took a nasty tumble yesterday. It wasn’t alone. A wave of negative risk sentiment washed over markets fueling demand for safe-haven U.S. dollars, and the greenback soared against the major G-10 currencies.
Sentiment started to turn negative after the Organization of the Petroleum Exporting Countries-plus-Russia meeting ended without a production increase announcement. Traders decided that existing production levels would not be sufficient to meet new demand as the global economy reopened. West Texas Intermediate (WTI) Prices rose, raising concerns that higher oil prices would lead to higher inflation.
Traders were also spooked by rising cases of the Delta-variant coronavirus, which threatened to derail the reopening of some economies.
The looming release of the minutes from the June 16 Federal Open Market Committee meeting was another source of angst.
Traders viewed the June 16 Fed FOMC statement and Summary of Projections (SEP) as hawkish as they showed Committee members projecting two rate increases in 2023, when the previous SEP didn’t have any. However, Fed Chair Jerome Powell and many of his colleagues pushed back against the notion of an earlier than expected Fed rate hike.
Traders and analysts hope that the minutes provide some clarity about how the Committee views inflation risks and the need for higher rates.
The major European equity indexes are trading higher and Wall Street equity futures are flat to slightly firmer. In addition, gold and oil prices are posting gains compared to yesterday’s New York closing levels.
The Canadian dollar was caught up in the drama. USD/CAD surged to $1.2495 from $1.2302 yesterday, and consolidated those gains in a $1.2435*$1.2472 band overnight. The short-term technicals are looking for a break above the long term downtrend line at $1.2500 to extend gains to $1.2650. However, rising oil prices will act as a drag on gains.
U.S. 10-year Treasury yields dropped from 1.44% yesterday to 1.34%, which suggests bond traders are not overly concerned about inflation risks, which helped to undermine USD/JPY.
EUR/USD traded narrowly in a $1.1813-$1.1833 range with safe-haven demand for U.S. dollars exerting downside pressure on the single currency. The European Commission upgraded their 2021 GDP growth forecast to 4.8% from 4.3%, and predicted inflation at 1.9%. Traders did not care.
The U.S. and Canadian economic reports are second-tier and will be overshadowed by the FOMC minutes.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians