The Canadian dollar is in free-fall. A surprisingly hawkish outlook by the U.S. Federal Open Market Committee sparked a wave of Canadian dollar selling that has continued unabated since Fed Chair Jerome Powell’s press conference ended. And the Canadian dollar isn’t even the worst-performing major G-10 currency against the U.S. dollar. That dubious honour goes to the Swiss Franc, which has dropped 1.76% between yesterday and today’s New York open.
FOMC members appear to have heard the market clamour around rising inflation risks. They reacted by not only raising their Personal Consumption Expenditures inflation forecast to 3.0% from 2.2% in March, but they also penciled in two rate hikes in 2023.
That’s a big move considering that just three months ago, 11 of the 18 Committee members expected interest rates to remain unchanged in 2023. Now only five members have that view.
Traders also reacted to Powell suggesting that the Committee may start the taper conversation while ignoring the fact that the discussions have not started.
The Canadian dollar was hammered as the prospect of two U.S. rate hikes erased the advantage the currency had benefited from when it was just the Bank of Canada forecasting rate increases.
And that forecast was for just one rate hike. Yield differentials shifted in favour of the U.S. dollar.
Canadian dollar traders are ignoring West Texas Intermediate (WTI) oil prices which remain supported in the $72.00/barrel area.
Bank of Canada Governor Tiff Macklem testified before the Senate Banking Committee yesterday. Macklem balanced a reasonably upbeat economic assessment with caution about choppy Q2 growth due to the third-wave coronavirus outbreak.
EUR/USD dropped below support in the $1.1990-$1.200 area and fell to $1.1927 in New York trading. The selloff was exacerbated after comments by European Central Bank Chief Economist Philip Lane. He said it was premature to discuss tapering the ECB PEPP program, highlighting the divergent ECB and FOMC monetary policy outlooks.
AUD/USD and NZD/USD were unable to get any traction from better than expected economic data. Australia added 155,200 jobs in May, well above the forecast for a 30,000 gain. New Zealand Q1 Gross Domestic Product surged 1.6% q/q, well above the 0.5% estimate. However, broad U.S. dollar demand due to the hawkish FOMC outlook trumped the data, and both currency pairs dropped.
Today’s U.S. data includes weekly jobless claims and the Philadelphia Fed Manufacturing survey..
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
