The Canadian dollar went splat. Yesterday, USD/CAD was in freefall, dropping from $1.2597 to $1.2468, and looking like it had further to fall. It didn’t.
A mini-"taper tantrum", reminiscent of what occurred in mid-2013 when then-U.S. Federal Reserve Chair Ben Bernanke opened the door to the Fed tapering quantitative easing bond purchases. Treasury yields spiked, and equity markets crashed. That’s what occurred yesterday.
Treasury yields started climbing at the beginning of the year, rising steadily from 0.914% on January 4. They appeared to have peaked in the 1.12% area in the first week of February. President Biden’s $1.9-trillion COVID-19 Relief program sparked fears that the stimulus spending would trigger a surge in inflation, which ultimately would force the Fed to raise interest rates way ahead of schedule.
That was not the message the Fed wanted to hear, and the policymakers pushed back.
Nevertheless, Treasury yields continued to grind higher, reaching 1.36% ahead of Fed Chair Jerome Powell’s semi-annual Congressional testimony. Powell reiterated that there were serious downside risks to the U.S. economic outlook, particularly that the employment situation was worse than reflected in the data.
He spent a lot of time explaining why the Fed would not immediately react to falling unemployment rates or higher inflation. That same day, Vice Chair Richard Clarida reminded markets that the January Summary of Economic projections did not forecast a rate hike until 2023.
The remarks did not ease bond market concerns. Thursday, better than expected U.S. jobless Claims and Durable Goods Orders data suggested the US economic recovery was robust. Also, the Fed’s seven-year Treasury auction did not fare very well. Treasury yields surged and reached 1.535%, and equity markets collapsed. The Nasdaq led the major indexes lower, losing 3.5%.
The U.S. dollar soared, and the Canadian dollar was collateral damage.
USD/CAD soared from $1.2468 and soared to $1.2650, then extended those gains overnight and touched $1.2683.
Further gains may be limited to $1.2730, which is resistance from the April 2020 downtrend. Prices will also get a bit of support from oil prices as WTI oil prices are above $60.00/barrel.
U.S. Chicago Purchasing Managers Purchasing Managers Index and Michigan Consumer Sentiment reports are on tap. Equity markets and Treasury yields will dictate FX direction.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
