- Eurozone inflation rises higher than expected, underpins US dollar
- “To pivot or not to pivot, that is the Fed question”
- US opens firm then catches a bid in NY.
USDCAD snapshot open 1.3641-45, overnight range 1.3603-1.3671, close 1.3606, WTI $86.97, Gold $1639.46
The Canadian dollar started the week on the defensive and continued to slide in early NY trading.
The Bank of Canada didn’t do the currency any favours last week when it surprised markets with a 50-bps rate hike after hinting that a 75 bp hike was likely. The result was that Canadian and US interest rate differentials widened in favour of the US.
The BoC justified the lower-than-expected rate cut by noting that domestic demand was far lower than previously estimated which greatly reduces one source of domestic inflation pressure. Nevertheless, Canada is also suffering from imported inflation pressures due to supply chain disruptions and the steep rise in energy prices.
The Canadian dollar is also vulnerable to a more hawkish-than -expected Fed meeting outcome on Wednesday. Fed officials appear to be leaking contradictory policy outlooks. Last week, a Wall Street Journal reported wrote the Fed was going to debate the pace of rate hikes at Wednesday’s meeting. The result was that stock markets rallied, and Treasury yields sank.
This weekend, the same reporter wrote that the Cash rich consumers may mean higher interest rates for longer. The US dollar caught a bid and Treasury yields rose.
EURUSD traded defensively in a 0.9915-0.9965 band. Eurozone inflation rose 10.7% y/y in October well above the forecast of 9.8%,
supporting comments by ECB policymaker Klaas Knot suggesting another 75-bps rate hike was possible.
GBPUSD traded in a 1.1517-1.1612 range ahead of the Fed meeting Wednesday and the Bank of England monetary policy meeting Thursday. The BoE is expected to raise rates 75 bps.
USDJPY is at the top of its 147.59-148.67overnight range. Prices are underpinned by the rise in the US 10-year yield from 4.017% to 4.058%.
AUDUSD traded in a 0.6389-0.6427 range, rising in Asia, and retreating to just above its session low in NY. The RBA is expected to raise rates by 25 bps tomorrow, despite inflation sitting above its 2022 target. Australian Retail Sales rose 0.6% in September, as expected.
The Chicago Purchasing Managers Index is expected at 47 compared to 45.7 in September.