Canadian Dollar Update – Canadian dollar rallies after BoC hikes
USD/CAD Open: 1.3156-60, Overnight Range: 1.3152-1.3193, Previous Close: 1.3187
WTI Oil open at $75.78 and gold open at $1,960.26. US markets are higher today.
- BoC hiked rates and issued a hawkish outlook.
- Weaker than expected US inflation data fuel broad US dollar sell-off.
- US dollar plunges across the board-CAD underperforms.
The Canadian dollar rallied sharply yesterday because US inflation was weaker than expected and the Bank of Canada (BoC) raised interest rates.
The BoC raised its benchmark rate by 25 bps which was widely expected but issued a somewhat hawkish monetary policy statement, which wasn’t. The statement warned that rates may have to rise even further and then remain at an elevated level for and extended period. They hedged themselves by insisting that future rate decisions would be data dependent. (Are all rate decisions supposed to be based on data?).
USDCAD plunged following the BoC announcement, dropping from 1.3241 to 1.3143 then bounced to close at 1.3187.
The BoC decision was overshadowed by the US inflation report for June and what it meant for the outlook for US interest rates. Headline CPI rose 3.0% y/y compared to 4.0% in May while Core-CPI rose 4.8% compared to 5.3% y/y.
Traders interpreted the result to mean that inflation was falling fast enough that the Fed may only hike rates once more and then be done. Bond traders certainly thought so. The drove the US 10-year Treasure yield down to 3.82% today, from 4.09% on Monday.
EURUSD is on a tear, rising unabated from 1.1012 yesterday to 1.1174 in NY today as traders embraced the view that the Fed tightening cycle is almost over while the ECB is still in rate-hiking mode. Traders ignored comments from ECB Governing Council member Ignazio Visco, who suggested that ECB rates would peak by year-end. Weaker-than-expected Eurozone Industrial production data (actual -2.2% y/y in May vs forecast -1.2%) was not a factor.
GBPUSD rallied on the back of broad US dollar weakness, rising from 1.2900 yesterday to 1.3078 in NY this morning. GBPUSD got an added boost after UK GDP was a tad better than expected. The economy still shrunk in May but only 0.1% m/m rather than the -0.3% expected.
USDJPY fell to 138.09 from 138.83 on the back of falling US Treasury yields and the prospect that Fed rates are at or near a peak, while the Bank of Japan may soon start to tighten.
AUDUSD soared following the US CPI data then extended its gains overnight, rising from 0.6787 to 0.6858 today. Traders ignored the weaker-than-expected Chinese trade data and focused on the reduced risk of Australian and US interest rate spreads widening in favor of the US.