- US weekly jobless claims ahead.
- Focus is on geopolitical tensions and tariffs.
- US dollar rises modestly overnight-JPY outperforms.
USDCAD: open 1.3969, overnight range,1.3958-1.3979, close 1.3976, WTI $69.95, Gold, $2670.01
The Canadian dollar flirted with disaster on Tuesday, as USDCAD briefly traded above 1.4100. This move was driven by a sharp widening of CAD/US 10-year interest rate spreads to -117.5 bps. However, the rally proved short-lived after Canadian inflation data exceeded expectations, reducing the likelihood of another 50 bp rate cut at the December 11 meeting. This morning, the 10-year spread narrowed to 100.8 bps, helping USDCAD retreat to 1.3960.
Geopolitical factors also played a significant role in CAD's volatility. Russian President Vladimir Putin's recent threats to use nuclear weapons as a deterrent against NATO aggression sparked a flight to safe-haven currencies, particularly the US dollar. While this risk-aversion sentiment eased yesterday, it reignited today after Russia launched an ICBM missile into Ukraine—a particularly concerning development given the missile's nuclear warhead capabilities.
The Canadian dollar also whipsawed in response to conflicting signals from two Fed policymakers. Governor Michelle Bowman advocated for a cautious approach to cutting interest rates, while her colleague Lisa Cook argued for moving rates lower. This mixed messaging added to the uncertainty in financial markets.
Equity markets are defensive. Japan's Topix index fell by 0.57%, while Australia's ASX 200 ended the session nearly flat. European markets were mostly lower, with the French CAC 40 declining by 0.50%. However, the UK FTSE 100 eked out a modest gain. U.S. S&P 500 futures dropped by 0.11%. The U.S. dollar index remained unchanged from the previous day's level, gold (XAUUSD) saw a slight uptick, and the 10-year U.S. Treasury yield held steady at 4.40%.
EURUSD traded in a narrow range of 1.0514-1.0555 overnight, with gains capped by the ongoing escalation of hostilities between Russia and Ukraine. Concerns about the potential impact of new U.S. tariffs on Europe's economic outlook also weighed on the euro. Technical indicators for EURUSD suggest a bearish bias, with support eyed at 1.0450.
GBPUSD fluctuated within a 1.2623-1.2660 range. Sterling found some support from speculation that the Bank of England might not cut rates as aggressively as anticipated following the release of the UK budget. However, gains were limited by a cautious market tone and apprehension over potential U.S. tariff measures.
USDJPY slipped from 155.44 to 154.09 after comments from Bank of Japan Governor Kazuo Ueda hinted at a possible rate hike during the December 19 monetary policy meeting. Ueda noted that there is still ample time before the meeting, during which significant new data and information would emerge to guide their decision-making.
AUDUSD edged higher, moving from 0.6502 to 0.6525 in subdued trading. The pair's price action was largely driven by sentiment around the U.S. dollar. Technically, AUDUSD remains bearish as long as it stays below the 0.6600 level.
