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USD / CAD - Canadian Dollar Flirting with Disaster

- Fears of sharply higher US interest rates stoke US dollar gains

- GBPUSD drops to 1985 levels

- US dollar extends gains across the board

USDCAD Snapshot open 1.3280-84, overnight range 1.3230-1.3294, close 1.3228, WTI oil $84.97, Gold $1660.02

The Canadian dollar got hammered yesterday and again overnight. Traders are flocking to US dollars after analysts suggest the “terminal” (or peak) rate for Fed funds is now 4.5% rather than 4.0%.

Ray Dali, founder of Bridgewater Associates, the third largest hedge fund in the world said If the terminal rate is 4.5%, stocks would fall another 20%. That wasn’t music to investor ears and contributed to yesterdays Wall Street sell-off.

The Canadian dollar was a victim of the flight to US dollars. USDCAD rose from a low of 1.3150 on Thursday to 1.3294 overnight breaking major technical resistance levels in the process and setting the stage for further gains.

The long term USDCAD technicals are bullish. The move through resistance at 1.3018 targets 1.3630 which represents the 61.8% Fibonacci retracement level of the 1.2025-1.4625 Covid range.

But the Canadian dollar is not alone. It is just another passenger on the US dollar rally train which has sank the major G-10 currencies.

The US dollar is also in demand because the prolonged US yield curve inversion (2-year US Treasury yields are above the 10-year yield) and suggests a recession is looming.

Economists at the World Bank agree. They argue the world is inching toward a global recession due to central banks hiking rates to fight inflation. The report said that the global economy was in its steepest slowdown since the 1970’s.

EURUSD traded erratically with a negative bias in a 0.9946-1.0011 range. ECB President Christine Lagarde may have given the single currency a bit of support when she said price stability is more important than growth. Euro area inflation rose from 8.9% in July to 9.1% y/y in August, with rising energy costs to blame.

GBPUSD is trading like it's 1985. Prices dropped from 1.1479 to 1.1352 before climbing to 1.1400 in NY. A steep drop 1.6% drop in Retail Sales exacerbated the negative sentiment from elevated recession risks and the energy crisis. Things could get ugly if prices drop below 1.1350.

USDJPY rallied from 142.84 to 143.68 due to higher US Treasury yields but intervention fears capped gains.

AUDUSD traded in a 0.6671-0.6723 range due to broad US dollar strength and lower commodity prices.

RBA Governor Philip Lowe’s comments weighed on sentiment after he said the Bank may consider easing the pace of rate hikes in October.

Today’s US data includes Michigan Consumer Sentiment index.