The Canadian dollar drifted lower yesterday due to a wave of broad U.S. dollar demand after U.S. Retail Sales data surprised to the upside. Americans got over their delta-variant coronavirus and supply-chain disruption fears and went shopping, demonstrating the resilience of the consumer.
U.S. Treasury yields soared on the news, with 10-year yields climbing to 1.64% today from 1.579% yesterday. The rise in yields did not phase Wall Street traders. The major indexes closed near record highs, but that move wasn’t repeated in Asia or Europe. Japan’s Nikkei 225 index fell 0.40%, while Australia’s ASX 200 lost 0.68%. European bourses are sitting close to unchanged while S&P 500 and DJIA futures are flat. Oil and gold prices are posting losses, mainly due to U.S. dollar strength.
Bank of Canada officials appear to be working overtime to confuse Canadians. Governor Tiff Macklem published a letter in the U.K. Financial Times, which can best be described as a "humblebrag" review of the central bank’s pandemic performance. One thing is clear: Tiff admits to a high degree of uncertainty around his outlook. The main takeaway from Macklem’s article is that if inflation is persistently higher than the bank's expectations, Canadian interest rates will rise.
However, that is not how Deputy Governor Lawrence Schembri views the outlook. He is focused on the "output gap" and "employment maximization," which are two components that cannot be quantified. If they can’t be quantified, how accurate are their conclusions?
A cynic would suggest that both officials are deliberately "muddying the waters" to keep interest rates at extremely low levels due to extremely high government deficits.
Canada Consumer Price Index is expected to rise 4.7% y/y in October, which will challenge the BoC’s bias to leave rates unchanged.
ECB policymakers have ensured there is no doubt as to their monetary policy outlook. President Christine Lagarde continues to insist that it would be foolish to tighten monetary policy because, "At a time when purchasing power is already being squeezed by higher energy and fuel bills, an undue tightening of financing conditions is not desirable, and would represent an unwarranted headwind for the recovery."
Eurozone CPI rose 4.1% y/y in September which was expected but still well above the ECB target of 2.0%.
GBP/USD chopped about in a $1.3398-$1.3471 range with gains from better than expected U.K. data offset by broad U.S. dollar strength.
USD/JPY rallied alongside rising U.S. treasury yields while the antipodean currencies were weighed down by broad U.S. dollar demand.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
