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USD / CAD - Canadian dollar gets dumped on Valentines Day

- US CPI kicks off another round of US dollar buying.

- Global risk sentiment sours on higher Fed rate fears.

- US recoups recent losses and rallies against G-10 majors.

USDCAD snapshot open 1.3400-04, overnight range 1.3336-1.3404, close 1.3337, WTI $78.29, Gold $1835.59

The Canadian dollar thought it was seeing the love on Valentines Day but instead it was unceremoniously kicked to the curb.

The January US inflation report showed CPI cooling from 5.7% y/y in December to 5.6% y/y. That wasn’t cool enough. Analysts were expecting a bigger dip (consensus forecast 5.5% y/y) and traders were positioned for that result.

Traders were disappointed. US bonds were sold aggressively which lifted the 10-year Treasury yield to 3.798% from Monday’s close of 3.71%. That move sent Wall Street stocks tumbling and boosted the US dollar.

Most of the moves were sustained. The S&P 500 index recovered all its losses and closed virtually unchanged. The 10 -year Treasury yield retreated to 3.72% by the time US markets opened today.

However, traders continued to buy US dollars and the greenback opened with gains across the board in New York today.

The inflation data and hawkish comments from a couple of Fed officials are underpinning prices.

New York Fed President John Williams cited the strength of the Labour market as evidence that inflation would remain higher for longer than expected. If so, the Fed would need to raise rates higher than current forecasts.

Philadelphia Fed President Patrick Harker predicted that Fed funds would be above 5.0%, depending upon the data.

EURUSD churned in a 1.0700-1.0800 range in the wake of the US inflation data yesterday, then consolidated in a 1.0701-1.0744 range overnight. Euro area Industrial Production fell 1.1% m/m and 1.7% y/y in December. EURUSD remains underpinned by the prospect of ECB rate hikes but the US rate outlook and Russia’s latest offensive in Ukraine is limiting gains.

GBPUSD traded negatively in 1.2058-1.2180 range with the session low seen in early NY trading. The selling pressures stems from the latest UK CPI data. Inflation slowed faster than expected to a still elevated 10.1% (December 10.5% y/y) in January. Some analysts suggest the CPI data means the BoE will not raise rates as much as previously expected.

USDJPY rallied from 132.56 to 133.48 due to the bounce in US Treasury yields.

AUDUSD traded in a 0.6890-0.6988 range due to broad US dollar strength. Hawkish comments by RBA Governor Philip Lowe suggesting the need for higher interest rates, were ignored.

Today’s US data includes Retail Sales, NAHB Housing Market Index, Capacity Utilization, Business Inventories and Industrial production