The Canadian dollar is adrift in a sea of U.S. inflation uncertainty. Traders continue to ignore domestic data as the loonie’s direction is determined by the U.S. interest rate outlook. That interest rate outlook may get revised after the release of today’s U.S. inflation report.
Analysts will pay close attention to the monthly change, which is expected to show inflation slipped from 0.5% m/m in July to 0.4% m/m in August. If so, it helps to support Federal Reserve Chair Jerome Powell’s view that inflation gains are transitory. Weaker-than-expected results will drive the U.S. dollar lower and give the Canadian dollar a boost.
The Canadian dollar is also being supported by the latest surge in oil prices.
Hurricane Nicholas, which made landfall in Texas this morning, is expected to disrupt oil supplies. A somewhat optimistic International Energy Agency (IEA) oil forecast predicting robust crude demand in October due to pent-up demand is also underpinning prices. The IEA forecast that global demand will fall 105,000 b/day in 2021 then rise by 85,000 b/day in 2022.
The Australian dollar was the worst-performing G-10 currency, and the only one to show a loss compared to Monday’s open. That is because of comments by Reserve Bank of Australia Governor Phillip Lowe.
Lowe said he had difficulty understanding how markets were pricing in rates hikes in 2022 and 2023. He repeated that the Overnight Cash Rate (OCR) would not rise before 2024 because domestic factors differed from those in other countries. He added that Australia Gross Domestic Product dropped to 2.0%, and there were downside risks to that forecast. AUD/USD dropped to $0.7332 from $0.7372 where it is trading in Toronto.
EUR/USD is consolidating yesterday’s gains in a $1.1801-$1.1829 band. European Central Bank policymaker Francois Villeroy repeated that inflation spikes were temporary, which served to reinforce last week’s dovish ECB actions.
GBP/USD got a boost from better than expected labour force data. Job vacancies are at record levels, and the number of employed people is back to where they were before the pandemic. The good news was tempered by a flare up of tensions between the UK and EU over Irish border checks. GBP/USD rallied to $1.3881 from $1.3831 and has a bullish bias.
Today’s U.S. inflation report will guide FX direction until next week’s Federal Open Market Committee meeting.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
