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USD / CAD - Canadian dollar continues to sink.

- Falling crude prices and weak Chinese data weigh on the Loonie.

- Analysts are downgrading early rate cut forecasts.

- US dollar adds to gains. GDP outperforms.

USDCAD: open 1.3516-19, overnight range 1.3480-1.3531, close 1.3490, WTI $71.09, Gold, $2026.19.

The Canadian dollar enjoyed a brief moment in the sun after the release of the December inflation data. It rallied sharply, then reversed course just as quickly. Inflation rose in December (actual Canada CPI 3.4% y/y, November 3.1%), which was not expected and suggested that the Bank of Canada would not be eager to cut rates in March.

But it is not as simple as that. The BoC anticipated that inflation would fall slower and erratically but continue to decline. In addition, the Canadian economy would also be slowing, and economists still believe that those two factors will let the BoC cut rates in the spring.

Even so, traders quickly forgot about Canadian data after Fed Governor Christopher Waller pushed back against aggressive and rapid rate cuts. He still thinks the Fed will be cutting rates, but he thinks the Fed should take a more measured approach. He said, “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”

Those comments drove Wall Street lower, Treasury yields higher, and boosted the US dollar. The US dollar rally continued overnight after China’s Q4 GDP data and Retail Sales data were below forecasts. Q4 2023 GDP 5.2% y/y (forecast 5.3%) and 1.0% q/q vs 1.3% in Q3. December Retail Sales rose 7.4% y/y (forecast 8.0%).

EURUSD drifted lower in a 1.0855-1.0885 range due to broad US dollar strength and weak stock markets. Eurozone HICP inflation was 0.5% m/m (forecast 0.4%) which supported ECB President Christine Lagarde’s remarks. She admitted that rates would be cut in 2024, but not until the summer. Other policymakers offered similar sentiments.

GBPUSD seesawed, falling from 1.2635 in Asia to 1.2606 in Europe, then surging to 1.2695 in NY, thanks to surprisingly robust inflation data. December CPI rose 0.4% m/m (forecast 0.2%) while Core-CPI was 5.1% y/y compared to the 4.9% expected. The GBPUSD rally was because traders reduced bets that the BoE would cut rates in May.

USDJPY climbed to 147.98 from 147.08 due to the US 10-year Treasury yield rising to 4.06% and due to the prevailing sentiment that the BoJ will not tighten policy in the near term.

AUDUSD traded in a 0.6535-0.6595 range due to weaker than expected Chinese data and broad US dollar strength.

Markets should be fairly active today as there are plenty of US economic reports including Retail Sales, Capacity Utilization, Industrial Production, and Business Inventories. In addition, Fed policymakers John Williams, Michelle Bowman, and Michael Barr are speaking.