The Canadian dollar is trading sideways as prices consolidate recent gains. The currency pair continues to track broad U.S. dollar sentiment, and the prevailing inflation view determines that sentiment. U.S. Producer Prices are in the spotlight this morning. October Headline Producer Price Index is forecast to rise 8.7% y/y and Core-PPI (ex-food and energy) to rise 6.8% y/y. The monthly increase is expected to be 0.5% for both headline and core.
A higher-than-expected result will spark another flurry of chatter, suggesting the U.S. Federal Reserve is too far behind the inflation curve and should raise U.S. interest rates sooner than planned. In addition, it will intensify the spotlight on Wednesday’s Consumer Price Index data.
Central bank officials continue to talk about inflation in every speech, which is evidence that they are stressed about rising levels.
Yesterday, many policymakers from various central banks attempted to convince audiences that inflation increases were temporary, and they cited a litany of examples to justify their views. One suggested inflation gains were due to rising house prices. Another blamed supply chain disruptions while Bank of England Governor Andrew Bailey attributed the gains to reopening the economy from post-pandemic lockdowns.
The comments would carry more weight with markets if traders believed central bankers had a good grasp of the current inflation dynamics.
Prior to the pandemic, those same bankers were perplexed as to why inflation was stubbornly below their target levels. Today, they want you to believe they know why inflation is overshooting benchmarks.
The U.S. dollar is trading lower compared to where it closed on Monday, largely due to the slide in U.S. 10-year Treasury yields, which fell to 1.458% from 1.492% overnight. Part of that move is because of speculation that President Biden may replace Fed Chair Jerome Powell with Lael Brainard. Brainard is characterized as very dovish and likely to maintain the Fed policy of low rates for longer.
EUR/USD climbed from $1.1587 to $1.1606 overnight, then dropped to $1.1573 in New York. Prices got a bit of a boost after German ZEW Economic Confidence was 31.7 in October compared to 22.3 in September. Gains may be capped due to the dovish ECB outlook and a new refugee crisis.
GBP/USD traded in a $1.3550-$1.3606 range overnight and is at the bottom of the band in New York. Support from an expected BoE rate hike in December is offset by fears of fresh EU/UK Brexit hostilities.
The U.S. economic calendar is empty, other than PPI data.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
