The Canadian dollar surged yesterday and again overnight. USD/CAD plunged from $1.2652 on Monday to $1.2475 today due to a fresh wave of positive risk sentiment washing over markets. As usual, it is not a Canadian dollar story.
Instead, hopes for a post-pandemic global economic boom is driving markets.
U.S. Federal Reserve Chair Jerome Powell did his part. Traders finally got the message that the Fed will not raise interest rates any time soon. Powell repeated his Congressional testimony yesterday. He stressed that Federal Open Market Committee monetary policy will remain unchanged until such time as inflation and unemployment levels are at the Fed’s mandated target and sustainable. Fed Vice Chair Richard Clarida echoed those remarks and said that monetary policy will remain unchanged for at least three years.
Traders took Powell’s words to heart and sold U.S. dollars across the board, except against the Japanese yen. USD/JPY climbed to 106.17 from 105.85 with prices tracking U.S. Treasury yields. 10-year Treasury yields soared to 1.444% in New York today, rising from an overnight low of 1.37%.
It was just two week’s ago when FX traders flocked into U.S. dollars because 10-year Treasury yields rose to 1.30% from 1.22%. Back then, they believed that President Biden’s $1.9-trillion spending plan would lead to higher inflation, forcing the Fed to raise interest rates.
Powell and a host of Fed officials have stomped all over that notion.
They said they are prepared to let inflation rise until the average inflation rate is sustainable around 2.0%.
Furthermore, they said that interest rates would not increase even if employment reached their target as the economy could run "hot" for a while.
The Fed’s view was well known, but FX markets didn’t truly react until the past few days. EUR/USD broke above its two-week peak overnight and rallied to $1.2237. European Union Consumer Confidence Index rose to 93.4 from 91.5.,which supported the gains. The E.U. statement said, "the ESI’s increase in February was driven by improving confidence in industry, services and among consumers, while confidence declined slightly in retail trade and remained broadly unchanged in construction."
Today’s data includes Durable Goods Orders, weekly Jobless Claims and Pending Home Sales.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
