- Fed expected to hike rates by 0.75% tomorrow
- GBPUSD fall exacerbated by data and politics
- US dollar extends yesterdays gains
USDCAD Snapshot: open 1.2922-26, overnight range 1.2868-1.2926, close 1.2899, WTI open $121.81, Gold open $1,824.08
The Canadian dollar was swept away in an avalanche of selling after analysts predicted a larger-than-expected Fed rate increase on Wednesday.
The fall-out from Friday’s scorching US inflation report led to a steep drop in bonds and global equities and a fresh wave of US dollar demand.
The 10-year US Treasury yield climbed from 2.98% just one week ago to 3.39% yesterday after economists at JP Morgan and Goldman Sachs predicted the Fed would raise rates 0.75%. They are not alone. The hike is fully priced in as evidenced by the CME Fedwatch tool showing a 95% probability of such a move.
The Canadian dollar was caught up in the broad US dollar demand. USDCAD climbed from 1.2750 in Asia on Monday to 1.2933 in NY today. Further gains may be hard to achieve as the 10-year Canadian Government bond yield is higher than the 10-year Treasury yield, and because the Bank of Canada is widely expected to hike its overnight rate by 0.75% on July 13.
The Canadian dollar is also deriving a modicum of support from high oil prices. West Texas Intermediate is comfortably above $120.00/barrel with further gains expected due to a demand/supply imbalance. The oil embargo on Russian crude and Opec’s struggles to increase production more than offset Covid concerns from China.
EURUSD rallied from 1.0398 in Asia to 1.0484 in Europe, then dropped to 1.0435 despite a modestly positive.
ZEW Survey data. The Survey noted “Financial market experts are less pessimistic about the economy. However, the economy is still exposed to numerous risks, such as the effects of the sanctions against Russia, the unclear pandemic situation in China and the gradual change of course in monetary policy.” The divergent ECB and Fed monetary policy outlook and bearish intraday EURUSD technicals suggest gains are capped in the 1.0500 area.
GBPUSD mirrored EURUSD price action rising from an Asia low of 1.2133 to 1.2207 in Europe before erasing the entire move following the UK employment report. The Office for National Statistics reported average UK wages fell at the fastest pace in 20 years. Traders are also concerned after the UK government introduced the Northern Ireland Protocol bill which unilaterally changes parts of the Brexit deal.
USDJPY bounced in a 133.88-134.81 range with gains from rising Treasury yields and dovish BoJ monetary policy offset by safe-haven demand for yen.
AUDUSD and NZDUSD were hammered by broad US dollar demand and lower commodity prices. AUDUSD is trading at the bottom of its 0.6892-0.6969 range. Both NAB Business Confidence and Conditions surveys were lower than in April.
US PPI is expected to rise 0.8% in May (April 0.5% m/m)
