- Surging US Treasury yields turn risk sentiment negative
- Australia’s central bank raises rates 0.50%
- US dollar opens strongly, JPY underperforms
USDCAD Snapshot: open 1.2594-98, overnight range 1.2570-1.2617, close 1.2580, WTI open $118.15, Gold open $1,846.97
The Canadian dollar could not break through resistance yesterday after early morning optimism soured. Prices drifted in a narrow range overnight.
The Canadian dollar’s benefit from last week’s Bank of Canada rate hike and hawkish comments by Deputy Governor Paul Beaudry is waning. The BoC is just one of most G-10 central banks with a tightening policy (the exception is the Bank of Japan), so its actions are lost in the crowd.
The Fed is driving the bus, and traders speculate that the US may need higher rates than initially anticipated.
Monday, former Treasury Secretary Larry Summers and a group of economists argued that today’s inflation rate is closer to the 1980 peak than previously thought. According to Bloomberg, they “recalculated historical readings for the consumer price index to apply modern-day spending patterns, especially for housing. The result was that core inflation was 9.1% in June 1980, not the 13.6% reported.
If the group data is accurate, that suggests that Fed chair Jerome Powell may need to be as aggressive as Paul Volker to tame inflation, resulting in a similar deep recession.
That story sparked a sharp rise in the US 10-year Treasury yield which jumped to 3.05% from 2.93%. Wall Street stocks gave back earlier gains but still closed in positive territory. Asian equity indexes closed mixed to lower. Japan’s Nikkei 225 index finished modestly higher, while the RBA’s 0.50% rate hike drove the ASX 200 down 1.53%. European bourses are deep in the red, except for the UK FTSE, which has only lost 0.11%. Oil prices inched lower while gold scraped out a tiny gain.
EURUSD is trading at the bottom of its 1.0666-1.0704 range, weighed down broad US dollar strength and by weak German data. Factory orders fell 2.7% m/m in April, after falling 4.2% in March.
GBPUSD is in the middle of its 1.2432-1.2533 range.
The currency extended yesterday’s losses in Asia with news that UK Prime Minister Boris Johnson barely surviving a “no-confidence” vote, exacerbating the slide. Prices have since rebounded to the 1.2500 area.
USDJPY surged alongside the jump in US Treasury yields, rising to 132.99 from 131.88. The BoJ’s yield curve control policy which caps JGB yields at 0.25% is driving US dollar gains.
AUDUSD traded in a 0.7161-0.7246 band. Prices peaked after the RBA surprised markets and raised the OCR rate by 0.50%. The gains were short-lived and AUDUSD is trading near the session low.
Canada and US Trade reports are due.
