– Geopolitics cast a pall over markets
– Rising US Treasury yields
– US dollar attempting to recover some yesterday’s losses
USDCAD Snapshot: Open 1.2684-88, Overnight Range-1.2684-1.2714, previous close 1.2707, WTI open $88.88, Gold open $1826.71
The Canadian dollar is in limbo. It rises and falls at the whim of broad US dollar sentiment while ignoring domestic data and influences.
The ongoing protests that have disrupted activity in major cities across the country and seriously disrupted cross-border traffic in Ontario and Alberta will take a toll on the economy in the form of product shortages and higher prices. So far, the disruptions have not impacted the currency as traders are focused on US developments.
Thursday, December US inflation data is due and expected to have risen 7.3% y/y. It hasn’t seen that level since 1982. Inflation was a severe problem 40 years ago, and there is no reason to believe it won’t be just as problematic in 2022.
The Fed inflation outlook should be regarded with a degree of skepticism. Fed officials were unable to explain why inflation was persistently below their targeted level of 2.0% before the pandemic, and they are scrambling to explain why inflation is so much above the target today.
The Fed turned hawkish recently, and investors reacted aggressively. The 10-year US Treasury yield soared to 1.958% yesterday from 1.614% January 4. The ECB took their time, but President Christine Lagarde turned hawkish during her press conference last week, warning about upward risks to inflation.
Policymakers on both sides of the Atlantic are now pushing back against views suggesting sharply higher interest rates. Monday, Ms Lagarde said that although inflation risks were on the rise, price pressures may decline before the became entrenched.
She said, “Demand conditions in the euro area do not show the same signs of overheating that can be observed in other major economies.”
Yesterday, Bank of France governor Francois Villeroy said that the inflation bump was temporary and would gradually diminish in the coming months. Federal Reserve Bank of San Francisco Mary Daly agreed saying the Fed should not be too aggressive in raising rates.
Those comments improved the risk tone and helped trap the Canadian dollar in a narrow range.
Oil prices are only having a limited impact on Canadian dollar price movements., although West Texas Intermediate (WTI) dropped from $89.85 to $88.64/b overnight.
There are no top tier economic releases from the US or Canada.