- Canada GDP expected to have risen 0.3% m/m in May.
- Bank of Japan surprises market by tweaking YCC.
- US dollar consolidating yesterdays gains.
USDCAD: open: 1.3222-26, overnight range 1.3221-1.3247, close 1.3225, WTI 79.89, Gold $1952.25
The Canadian dollar experienced a rapid decline yesterday due to strong US economic data, indicating that the American economy would avoid a recession despite 525 bps of rate hikes in eleven months.
In Q2, the US economy grew by 2.4% year-on-year, surpassing the forecast of a 1.8% increase. Additionally, reports on Durable Goods Orders and weekly jobless claims exceeded expectations, leading to a US dollar rally and an equity sell-off as investors anticipated another Fed rate hike.
However, things took a turn for the worse after a report in the Japan Nikkei newspaper. It revealed that the Bank of Japan would make adjustments to its yield curve control (YCC) strategy, causing USDJPY and EURJPY to drop significantly and boosting US Treasury yields.
The report turned out to be accurate, as the BoJ decided to add more flexibility to the YCC, allowing it to fluctuate within a 1.0% band.
Although this tweak might seem insignificant at first, it holds significant implications. It suggests a shift away from the BoJ's ultra-easy monetary policy and hints at potential rate hikes in the future.
This development spells bad news for investors who rely on the carry trade strategy, which involves borrowing funds in a low-interest-rate currency (like the Japanese Yen) to invest in a higher-yielding currency (such as the Euro). The erratic and wide-ranging movements of USDJPY and EURJPY reflect this uncertainty.
Amidst the Canadian dollar's losses, surging oil prices provided some relief. West Texas Intermediate (WTI) surged to $80.56/barrel yesterday and traded within a $79.53-$80.17 range overnight, boosted by OPEC's recent production cuts and hopes for increased demand from China.
Today, the Canadian dollar may receive a boost from May's GDP data. The Canadian economy is expected to show growth of 0.3% month-on-month, compared to 0.1% in April. If the growth exceeds expectations, it could lead to increased demand for the Canadian dollar.
However, weaker-than-forecast data might be dismissed due to factors like the Public sector strike and fires in Alberta.
Today's US data includes the Personal Consumption and Expenditure Price index and the Employee Cost Index. Weaker-than-expected results would likely have a positive impact on risk sentiment, leading to a broad decline in the US dollar.
