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USD / CAD - Canadian dollar sinks on risk aversion

- Fitch Ratings downgrades US debt rating.

- Risk sentiment sours again.

- US dollar in demand, commodity currency bloc underperforms.

USDCAD: open: 1.3310-14, overnight range 1.3266-1.3316, close 1.3282, WTI 81.88, Gold $1949.75

The Canadian dollar retreated rapidly yesterday and overnight due to a fresh wave of negative risk sentiment washing over markets. Traders were caught off-guard when Fitch Ratings downgraded the US debt rating from AAA- to AA+. The agency said the downgrade reflects the "erosion of governance," which has led to "repeated debt limit standoffs and last-minute resolutions." Standard and Poor could have responded with "it's so 2011," as that was the year it downgraded US debt to AA+. Many analysts downplayed the news because it did not reflect any new information.

Yesterday's US data offered encouragement for those expecting a soft landing despite the Fed's aggressive rate hikes since March 2022. The JOLTS job openings report was slightly weaker than expected, which Chicago Fed President Austan Goolsbee said was consistent with the strong labor market moving to a more balanced level.

The Canadian dollar losses lagged those of the Australian and New Zealand dollars, partly because of firmer oil prices. West Texas Intermediate climbed from $80.58/b on Monday to $82.41 overnight as traders expect rising demand in a tighter supply environment.

Asian equity indexes closed with losses due to the poor risk environment. Japan's Nikkei 225 index lost 2.30%, while Australia's ASX 200 fell 1.29%. Negative risk sentiment in Europe has knocked the German Dax down 0.70% and the UK FTSE 100 index down 0.96%. S&P 500 futures are down 0.47%, while the US 10-year Treasury yield is steady at 4.017%.

EURUSD gave up most of Tuesday's gains, falling from 1.1020 to 1.0970, mainly due to broad safe-haven demand for US dollars. The Eurozone data calendar was light, and traders were content to await Thursday's Services PMI and PPI data.

GBPUSD see-sawed in a 1.2761-1.2805 band due to risk aversion and position adjustments ahead of Thursday's Bank of England meeting.
USDJPY chopped about in a range of 142.24 from 143.3. Traders were torn between higher US Treasury yields and safe-haven demand for yen.

AUDUSD dropped to 0.6566 from the 0.6630 range, weighed down by weak domestic economic data (Construction PMI -9.2, vs 10.6 in May, Industry Index -14.7 vs -11.9 in May) and negative risk sentiment.

Today's US ADP employment report is expected to show a gain of 189,000 jobs compared to 497,000 last month.