- Loonie jumps 1.2% after Canada CPI surges to 6.7% y/y
- EURUSD underpinned by hawkish ECB comments
- US dollar on the defensive again
USDCAD Snapshot: open 1.2472-76, overnight range 1.2460-1.2500, previous close 1.2495, WTI open $103.14, Gold open $1,945.63
The Canadian dollar consolidated yesterday’s inflation gains overnight, opening in NY as the second best-performing G-10 currency compared to Wednesday’s close.
Things are getting expensive in Canada. Statistics Canada reported, “In March, Canadian consumer prices increased 6.7% year over year, one percentage point higher than the gain in February (+5.7%). This was the largest increase since January 1991 (+6.9%). Excluding gasoline, the Consumer Price Index (CPI) rose 5.5% year over year in March, the fastest pace since the introduction of the all-items excluding gasoline special aggregate in 1999.”
Economists were expecting a 6.1% y/y increase for the headline and a 4.2% rise in Core-CPI.
The substantially higher than expected results got their attention. Many are now forecasting Bank of Canada (BoC) rate hikes of 0.50% on June 1 and another 0.50% hike on July 13. In addition, they expect 0.25% at the following three meetings making the overnight rate 2.75% by year-end.
The BoC is committed to getting inflation down to its 2.0% target. Governor Tiff Macklem said inflation would fall to 2.5% by the second half of 2023. He also said the neutral interest rate (defined as the level that neither stimulates nor weighs on the economy) is in the 2.0-3.0% area).
The math doesn’t work. If Canadian rates finish the year at 2.75%, they will still be below the top of the “neutral rate “ range. Arguably the overnight rate needs to rise faster than economists are projecting in order to tame inflation.
Soaring inflation is not just a Canadian problem. The Euro area is suffering as well. This morning Eurostat reported, “The euro area annual inflation rate was 7.4% in March 2022, up from 5.9% in February.”
Those results spooked some ECB policymakers. Luis de Guindos said “the ECB should be able to end asset purchases and raise interest rates in July. A colleague, Pierre Wunsch, said “Without any really bad news coming from that front, hiking by the end of this year to zero or slightly positive territory for me would be a no brainer.”
EURUSD soared on the news rising from 1.0825 to 1.0935 before easing in early NY trading.
Broad US dollar weakness lifted GBPUSD from 1.3044-1.3089, although EURGBP demand limited gains.
USDJPY traded lower, tracking the softer 10-year Treasury yield, which consolidated in a 2.845%-2.898% range. Prices dropped from 128.61 to 127.63 before bouncing to 128.10 in NY.
NZDUSD rallied after a higher than expected inflation report which lifted the currency pair from 0.6769 to 0.6808.
Weekly jobless claims and Philadelphia Fed Manufacturing data are ahead.
