- Geopolitics and US rate outlook fuels US dollar demand.
- US Core PCE data and Michigan Consumer Sentiment in focus.
- US dollar opens firm, adds to yesterday’s gains.
USDCAD snapshot open 1.3574-78, overnight range 1.3529-1.3602, close 1.3549, WTI $76.01, Gold $1822.46
The Canadian dollar is under duress. Broad-based US dollar demand due to rising geopolitical tensions, the prospect for higher US interest rates, and month-end portfolio rebalancing flows, has knocked the Canadian dollar down to levels last seen on January 6.
The Bank of Canada decision to announce it would be pausing rate hikes is another key factor weighing on the Loonie. Governor Tiff Macklem told the House of Commons Standing Committee on Finance that “inflation has turned a corner” and the BOC wanted to assess the impact of eight consecutive interest rate increases since March 2022.
The BoC is holding its benchmark rate at 4.50% while the US Fed is planning at least another 75 bps of rate hikes this year, which would take the Fed rate to 5.50%.
The widening CAD/US interest rate differential helped lift USDCAD from 1.3265 at the beginning of February to 1.3593 in NY this morning.
Global risk sentiment deteriorated this week due to the inflammatory rhetoric out of Russia after US President Biden visited the Ukraine.
Russian President Vladimir Putin suspended his country’s participation in the START nuclear arms treaty and claimed that the US was turning Russia’s invasion of Ukraine into a global war.
The Canadian dollar is also seeing pressure from portfolio manager month-end rebalancing selling as the S&P 500 index is down over 1.7% this month.
The nomination hearings for the next governor of the Bank of Japan captured attention in Asia. The government’s reportedly preferred candidate Kazuo Ueda walked a fine line between being dovish or hawkish. He said that the current monetary policy is appropriate, and the Japan needs more time for inflation to sustainably hit its 2.0% target.
He didn’t quantify sustainable. Japan CPI has been above 2.0% since May 2022 and January CPI rose 4.3% y/y compared to 4.2% in December. It is long past the sustainability target.
EURUSD is at the bottom of its 1.0574-1.0614 weighed down by news Germany is heading into a recession. Q4 GDP fell a worse than expected 0.4% q/q (forecast -0.2% q/q).
GBPUSD is trading negatively in a 1.1977-1.2041 range due to broad US dollar demand and a negative outlook for the UK economy.
USDJPY churned in a 134.08-135.48 range and is trading at the top of that band in NY. The gains were due to BoJ Governor nominee Kazuo Ueda saying that current BoJ monetary policy is appropriate.
AUDUSD tracked broad US dollar sentiment and traded in a 0.6763-0.6823 range.
Today’s US data include PCE price index with the core PCE expected at 4.3% y/y compared to 4.4% previously.
