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USD / CAD - Canadian dollar supported by improved risk sentiment

- China’s targeted stimulus boosts risk sentiment

- Commodity prices gain on China news.

- US dollar opens little changed from close.

USDCAD: overnight range 1.3149-1.3187, close 1.3168, WTI 78.65 Gold $1957.25

The Canadian dollar is treading water but managing to drift higher inside a narrow band, although the price action is just “noise” until the FOMC decision tomorrow.

The Bank of Canada appears to have a modestly hawkish bias as it seems concerned with the sluggish progress of inflation to its 2.0% target and that’s why economists and analysts are expecting another 25 bp rate hike in September or October. The BoC’s key inflation metric-core-CPI ticked down to 3.8% from 3.9% and that has put the hawks among the doves.

The BoC has hiked rates 475 bps since they started the tightening cycle in March 2022 which had a negative impact on housing prices, but buyers have emerged, and new home prices rose in May and again in June. That is a concern for policymakers as they estimate higher prices could add 0.3% to CPI in 2023.

A large reason for the steep fall in inflation was because of the drop in gasoline prices. The latest production cuts by Saudi Arabia and Russia combined with China’s attempts to stimulate its economy, could reverse some of that inflation decline.

The risk of higher Canadian interest rates, hand higher oil and other commodity prices if China’s stimulus efforts are successful, should not only limit Canadian dollar losses, but give the Loonie wings.

Nevertheless, those are longer term issues and traders only have eyes for the Fed.

Monday’s Chicago Fed National Activity Index (CFNAI), which the Chicago Fed describes as a monthly index designed to gauge overall economic activity and related inflationary pressure ticked lower to -32 from -28 in May.

The Fed has already raised rates by 525 bps and economists expect the widely anticipated 25 bp bump on Wednesday will be the last. Speculators are already amassing large short US dollar positions in anticipation of an easing cycle being in March 2024.

Chinese authorities are attempting to stimulate renewed growth by words and actions and today announced another series of targeted measures, including infrastructure and housing projects.

European markets were a tad subdued. The British pound slightly outperformed the Euro after the German Ifo survey dropped for the third consecutive month, coming in at 87.5 in July, from 88.5 in June.

US Consumer Confidence, and Case-Shiller Housing Prices data alongside Q@ earnings reports will drive FX markets today.