The Canadian dollar rallied Friday, with gains fueled by a broad U.S. dollar selloff following U.S. Federal Reserve Chair Jerome Powell’s Jackson Hole speech. The Canadian dollar got an added lift from higher oil prices due to Hurricane Ida.
Powell’s Jackson Hole speech was highly anticipated with many traders expecting that he would announce the timing for the onset of tapering monetary stimulus. That anticipation was stoked by numerous Fed officials commenting in interviews and speeches that broadening price pressures would necessitate tapering much sooner than planned. Dallas Fed President Robert Kaplan was pushing for an announcement at the September FOMC meeting.
St Louis Fed President James Bullard echoed his remarks and said the economy did not need much more stimulus. Kansas City Fed President Esther George agreed and said tapering should start this year.
Those comments and similar remarks from other Fed policymakers lifted the U.S. dollar and 10-year Treasury yields, while weighing on gold prices.
Powell did not agree with his colleagues. He said, "the Fed's goal is to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time." Then he pointed out, "we have much ground to cover to reach maximum employment."
Powell’s view outweighs the combined views of the Fed officials calling for tapering, as he is a voting member and Chair of the Federal Open Market Committee. His cohorts are not calling for tapering.
The U.S. dollar erased all its gains ahead of Powell’s speech and then consolidated those gains overnight. Trading activity was quieter than usual due to a U.K. Bank holiday.
Oil prices are well below Friday’s peak levels but are still 12% higher than last Monday. Hurricane Ida led to 96% of Gulf of Mexico oil production being shut down, which has fueled the price gains.
This is the last week of August, and that means month-end portfolio rebalancing flows. The S&P 500 has gained over 2.4% month to date, which suggests portfolio managers will need to sell USD/CAD.
The U.S. non-farm payrolls report is out Friday and is expected to show a gain of 728,000 jobs in August. A gain of over one million jobs will reignite the "early-taper" debate.
Today’s U.S. and Canada data is second-tier and should not impact FX markets.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
