- Canada’s lower inflation data undermines Canadian dollar
- Risk sentiment sours after Russian news
- US dollar rallies on safe-haven demand
USDCAD snapshot: open 1.3361-64, overnight range 1.3360-1.3392, close 1.3368, WTI $86.04, Gold $1673.53
The Canadian dollar plunged Tuesday and consolidated the losses overnight.
USDCAD soared from 1.3239 yesterday to 1.3392 overnight after lower-than-expected Canadian inflation data, a surge in the US 10-year Treasury yield, and safe-haven demand for US dollars on Russian news.
Canada’s August inflation rate fell to 7.0% from 7.6% y/y in July, while Core inflation (ex-food and energy) dropped to 5.8% from 6.1%. Statistics Canada wrote, “This was the second consecutive slowdown in the year-over-year price growth and was largely driven by lower gasoline prices in August compared with July.”
The news undermined the Canadian dollar on fears that the Bank of Canada would be less aggressive in raising rates, even though 7.0% inflation exceeds the BoC target of 2.0%.
BoC Deputy Governor Paul Beaudry may have inadvertently supported the “less aggressive” view when he seemed to push back against the risk of a Canadian recession from BoC rate hikes. He said in a speech that if people believe that current inflation levels are not sustainable, it “greatly reduces the need to engineer a period of significant economic slack to get back to target on a sustainable basis.”
The Canadian dollar sank rapidly yesterday after the S&P 500 index plunged when the US 10-year Treasury yield soared to 3.569% from 3.451%.
The US dollar extended yesterday’s gains in Europe after Russian President Putin addressed his nation and announced he was mobilizing an additional 300,000 troops. The announcement complemented earlier news that Russian planned to hold a referendum in all occupied Ukraine territories in a precursor to a formal annexation.
Traders were spooked when Putin said, “I want to remind you that our country also has various means of destruction, and some components are more modern than those of the NATO countries. And if the territorial integrity of our country is threatened, we will certainly use all the means at our disposal to protect Russia and our people. This is not a bluff.”
Risk sentiment is also negative due to widespread expectations for a hawkish FOMC meeting outcome. The Fed is expected to raise interest rates by 75 bps, while the dot-plot forecast will project higher rates for longer.
However, that outcome is reflected in current rates suggesting the US dollar is vulnerable to a corrective sell-off.
