February 17, 2023
- Rising Treasury yields sink equities, boost US dollar.
- US and Canada closed Monday.
- US dollar ending week on strong note.
FX at a glance-weekly change
Source: IFXA Ltd/RP
USDCAD Snapshot: open 1.3516-20, overnight range 1.3454-1.3536, close 1.3457
USDCAD caught a bid yesterday and extended the rally overnight. Traders rushed to buy US dollars against the G-10 majors after better-than-expected jobless claims and hotter than expected PPI inflation data. The rally got legs following hawkish comments by two Fed officials argued for 50-bp rate hikes.
BoC Governor Tiff Macklem didn’t shed any light on whether the recent strong employment report would change the BoC decision to pause hiking rates.
He told the House Banking Committee that the effects of higher rates need to work through the economy, labour market tightness needs to ease, wage growth needs to moderate and businesses need to return to more normal pricing behaviour.
Those comments suggest announcing a rate hike pause was premature.
Deputy Governor Paul Beaudry explained to an Alberta School of Business audience why it was important to get inflation back to 2.0%. He said that since Canada’s experience with high inflation was different from other countries., the path to the inflation target would be different as well. And the exchange rate would play a major role.
He said a lower inflation rate makes Canadian goods more competitive and then used the “Big Mac Index to explain the Canadian dollar response.
Source: Bank of Canada
It is telling that with all the financial models used by the multitudes of economists and analysts at the BoC, the Big Mac Index is the one Mr Beaudry chose to illustrate the relationship of inflation to the currency. Perhaps it is a sign that the bloated academic herd at the BoC needs to be culled.
Nevertheless, the BoC actions of late, make them a bystander in FX markets. It is the Federal Reserve policies and the reaction of the S&P 500 index to those actions that drives USDCAD direction.
Canada is closed for a holiday Monday.
USDCAD Technical Outlook
The intraday USDCAD technicals are bullish above 1.3420 which is now support following the decisive break above resistance in the 1.3460-80 area. A break below 1.3480 targets 1.3420.
Longer term, Bollinger Bands and RSI studies indicate USDCAD is overbought and getting close to extreme levels. That suggests sellers will be active in the 1.3550-1.3580 zone.
For today, USDCAD support is at 1.3460 and 1.3420. Resistance is at 1.3550 and 1.3580
Today’s range 1.3460-1.3540
Chart: USDCAD daily
Source: Saxo Bank
G-10 FX recap and outlook
We know who let the dogs out. The Baha Men said it was some unruly party-goers in a song released 23 years ago. Today, traders are asking “who let the hawks out?”
Cleveland Fed President Loretta Mester and St Louis Fed President James Bullard advocated for 50-bp rate hikes in speeches yesterday. Mr Bullard wants to boost the fed funds rate to 5.25-5.50% quickly.
Ms Mester said the Fed needs to bring policy into a more restrictive zone. She said that the incoming data hadn’t changed her view that Fed funds need to go “above 5.0% and stay there for some time.”
Neither are FOMC voters but that didn’t stop traders reacting as if the Fed announced a rate hike. The S&P 500 dropped and closed with a 1.38% loss while the US 10-year Treasury yield jumped to 3.90% from 3.78%.
EURUSD sank in a 1.0614-1.0674 range with low seen in early NY trading, before prices inched higher to 1.0635. The single currency is under pressure due high German PPI data (actual 17.8% y/y) and hawkish comments by Fed officials that led to broad US dollar demand.
GBPUSD traded in a 1.1916-1.1989 band then rebounded to 1.1955 in NY. BoE Chief Economist Huw Pill. Comments yesterday, expressing concerns about over-tightening weighed on the currency. UK Retail Sales rebounded in January, rising 0.5% m/m compared to a 1.2% drop in December.
USDJPY rose to 135.11 from 133.96 then retreated to 134.73 in NY. Prices are supported by higher US Treasury yields.
AUDUSD dropped to 0.6813 from 0.6878 before rising to 0.6838 today as price action tracks US dollar sentiment and commodities.
NZDUSD traded in a 0.6196-0.6255 band. The RBNZ is expected to hike rates 50 bps on Wednesday.
FX open, high, low, previous close as of 6:00 am ET
Source: Saxo Bank
Bank of China Fix: 6.8659, Previous: 6.8519
Shanghai Shenzhen CSI 300 fell 1.44% to 4034.51.
Chart: USDCNY 1 month