– BoC leaves rates unchanged and Canadian dollar plunges.
– Fed Chair Powell warns of higher rates for longer.
– US dollar retreated overnight but still higher since Monday.
USDCAD snapshot open 1.3790-94, overnight range 1.3792-1.3816, close 1.3803, WTI $76.60, Gold $1818.14
The Canadian dollar plunged after the Bank of Canada left interest rates unchanged and issued a dovish monetary policy statement.
Leaving interest rates unchanged was universally expected, largely because BoC Governor Tiff Macklem essentially pre-announced the decision at the January meeting. Policy makers believe that the 425 bps of rate hikes from last March are enough to drive inflation down to 3.0% this year and to the 2.0% target in 2024.
The central bank thinks it is on the right track as Q4 2022 growth was lower than expected and inflation had fallen to while admitting that labour markets were still tight, the unemployment rate was close to historical lows and inflation had fallen to 5.9%.
Meanwhile, south of the border, similar data points spooked Fed officials. On Tuesday and Wednesday, Chair Jay Powell cited tight labour markets, high job vacancies, and sticky inflation as reasons for aggressively hiking US rates higher and for longer than previously expected.
The hawkish Fed outlook knocked US equity markets lower, lifted the US 10-year Treasury yield to close to 4.0%, and boosted the US dollar across the board.
USDCAD rallied as well, rising from a Tuesday low of 1.3602 to 1.3816 overnight. The prospect of widening CAD/US interest rate differentials in favor of the US alongside softer crude oil prices fueled the gain.
USDCAD also derived support from West Texas Intermediate oil prices being unable to sustain gains above $80.00 per barrel. WTI dropped from $80.91 b/d on Monday to $76.20 overnight, with prices weighed down by broad US dollar strength. In addition, prices declined due to concerns that China’s economic rebound will not be as robust as previously anticipated.EURUSD traded cautiously in a 1.0539–105.81 range. There were not any top-tier economic reports available, leaving traders to bide their time until Friday’s US employment data.
GBPUSD is consolidating this week’s losses in a 1.1833-1.1888 range while awaiting tomorrow’s US employment report. The currency is on the defensive due to broad US dollar strength and the BoE and Fed’s interest rate outlooks.
USDJPY traded defensively, falling from 137.24 to 136.12 ahead of BoJ Governor Haruhiko Kuroda’s final monetary policy meeting Friday.
Kazuo Ueda was approved as his successor. Soft GBP data supports the case for the BoJ to stick with its easy monetary policy
AUDUSD is trading near the top of its 0.6578-0.6621 range on profit-taking with traders tweaking positions ahead of Friday’s US data.
US weekly jobless claims are expected to rise 5,000 to 195,00, is evidence the labour market is still tight.