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USD / CAD - Canadian dollar heading into long weekend

- G-7 and Powell-Bernanke discussion in focus

- Canada closed Monday.

- US dollar retreats slightly, overnight.

USDCAD snapshot: open 1.3470-74, overnight range 1.3472-1.3511, close 1.3502, WTI $72.66, Gold $1967.86

The Canadian dollar traded with a modestly bullish bias in a narrow range overnight. However, it remains firmly entrenched in the broad USDCAD 1.3300-1.3650 band.

The Bank of Canada released its Financial System Review (FSR) and said it was concerned about household debt. “The Bank of Canada is more concerned than it was last year about the ability of households to service their debt. More households are expected to face financial pressure in the coming years as their mortgages are renewed. The decline in house prices has also reduced homeowner equity, and some signs of financial stress—particularly among recent homebuyers—are beginning to appear.”

Mortgage stress should not surprise anyone. After all, it was Governor Tiff Macklem who in June 2020 told consumers “If you’ve got a mortgage or if you’re considering making a major purchase, you can be confident rates will be low for a long time.” Many homebuyers who took Mr Macklem at his word, may suffer as the BoC hiked rates by 425 bps since that comment.

Domestic developments had little bearing on FX activity.

Traders reacted to better-than-expected US weekly jobless claims data and reduced the odds the Fed will leave interest rates unchanged on June 14. There is now a 38% chance for a rate hike according to the CME FedWatch tool.

Risk sentiment turned positive following comments that Republicans and Democrats may announce a deal on debt ceiling negotiations next week.

Asian equity indexes followed Wall Street’s lead and closed with gains, led by a 0.59% rise in Japan’s Nikkei 225 index. Chinese stock markets were anomalies and Hong Kong’s Hang Seng index fell 1.53%. European bourses post gains while S&P 500 futures rise 0.15%.

Canada Retail Sales are expected to have dropped 1.4% m/m in March, but the results will not have a lasting impact on the Canadian dollar.

EURUSD drifted higher in a 1.0761-1.0803 range due to modestly improved risk sentiment and profit-taking, although the increased odds (37%) that the Fed will raise interest rates in June cap gains.

GBPUSD traded in a 1.2394-1.2436 range and is riding the coat-tails of US dollar sentiment, due to a dearth of domestic drivers.

USDJPY rallied steadily all week, rising from 135.73 on Monday to 138.72 overnight. The rise in US Treasury yields and the Bank of Japan’s dovish bias fueled the gains.

AUDUSD traded choppily in a 0.6618-0.6662 range and is close to the top of that range on improved risk sentiment.