The Canadian dollar jumps to its highest level in two years after increasing interest rates
The Loonie soared to two years highs against the US Dollar as the Bank of Canada raised its benchmark rate 0.25% to 1.0%. This was the second rate hike by the BOC this year and surprised most traders. The Dollar Index (USD/DXY) finished virtually flat, down 0.05%. The Greenback initially fell when Fed Vice Chairman Stanley Fischer announced plans to resign in October. The Dollar then jumped after President Trump reached a deal with Congress to extend the debt ceiling and fund the government through to December. US Treasury prices dropped and Yields climbed back up.
German Factory Orders missed expectations with a print of -0.7% against -0.2%.
Canada’s Trade Deficit improved to -CAD 3 billion from the previous -CAD 3.8 billion.
US Trade Deficit in August improved to -USD 43.7 billion against a forecast -USD 44.6 billion.
US August ISM Non-Manufacturing PMI improved to 55.3 from the previous 53.9, but less than the 55.8 that analysts had forecast
Yields were mostly higher. The yield on the benchmark Ten Year US Treasury climbed to 2.10% from 2.06% yesterday. The German Ten Year Bund yield rose 1 basis point to 0.34%. Canada’s Ten Year bond yield jumped 8 basis points to close at 1.94%. In contrast, the yield on Australia’s Ten Year note dropped 7 basis points to 2.60%.
Wall Street stocks finished mostly higher on the debt ceiling deal. The Dow was up 0.25 %, while the S&P 500 closed flat.
USD/DXY – ended virtually flat at 92.240 from 92.290 yesterday
EUR/USD – closed at 1.1920 against 1.1917 yesterday, little-changed
USD/CAD – finished down 1.15% at 1.2225 from 1.2377 yesterday
USD/JPY – rose to close at 109.28 (108.77) as risk sentiment settled.
AUD/USD – touch higher to 0.8001 at the NY close from 0.7996 yesterday
GBP/USD – mild gains to 1.3045 from 1.3032
Outlook: The Bank of Canada surprised many by raising rates yesterday. USD/CAD fell 1.9% to 1.2136 as a rate hike was not fully priced in. The 0.25% increase is the second after the BOC hiked in July. The Canadian central bank said the rate increase was warranted after unexpected strong economic growth in Q2. Canada’s Q2 GDP raced to a 4.5% pace which is the highest amongst G7 countries. The BOC also cited the strong Canadian Dollar which has risen 10% against the Greenback this year.
Meantime the US Dollar traded in two halves steered by the developments. The Dollar was pressured after Fed Vice President Stanley Fischer (a moderate) announced his retirement. Fischer was a proponent of reducing the Fed’s massive balance sheet. The successor to Fischer will be named by President Trump and is critical to the Fed’s interest rate outlook and supervision policies.
The Greenback then spiked after news that Trump had reached an agreement to extend the debt ceiling and fund the government through to mid-December.
Key events and economic data today and tomorrow will determine the next big moves.
Australian Trade Balance and Retail Sales: (GMT 1.30 am, Sept 7/Local Time 11.30 am, Sept 7) Trade balance forecast: range of surplus of AUD 875 to AUD 930 million against the previous AUD 856 million. Retail Sales forecast: 0.3% against the previous 0.3%.
Euro Zone Q 2 GDP, Quarterly and Annually (GMT 9 am, Sept 7/Local Time 7 pm, Sept 7) forecast for Q/Q 0.6% against previous 0.6%; Y/Y forecast: 2.2% against previous 2.2%
European Central Bank Minimum Bid Rate: (GMT 11.45 am, Sept 7/Local Time 9.45 pm, Sept 7) forecast: The ECB is not expected to change it’s minimum bid rate at 0.00%.
European Central Bank Monetary Policy Statement and Press Conference: (GMT 12.30 pm, Sept 7/Local Time 10.30 pm, Sept 7).
US Weekly Jobless Claims (GMT 12.30 pm, Sept 7/Local Time 10.30 pm, Sept 7): forecast: 245,000 from previous 236,000.
Trading View: While the Dollar managed to finish flat, the tone is generally softer. The uncertainty of the US debt ceiling dilemma was postponed until mid-December. Stanley Fischer who is a known moderate is also a proponent of reducing the Fed’s balance sheet. This could well be passed over in the September meeting which will weigh on the Greenback. The Fischer resignation announcement has also speeded up Donald Trump’s ability to gain control of the Federal Reserve.
Expect further consolidation for the Dollar within established ranges until the ECB’s rate decision later. A dovish ECB would see the Greenback get the traction it needs to move up again.
EUR/USD – finished little-changed after trading to 1.19502 overnight high following the Fischer announcement. EUR/USD then fell back to 1.1900, ending the North American session at 1.1920. There is immediate resistance at 1.1950. Short term support is found at 1.1900 and then at 1.1880. Traders are looking to see what Mario Draghi and his colleagues will say about the Euro’s strength and it impacts on
the economy and inflation. EUR/USD has been trading a wider range of 1.1670-1.2070 since mid-July. Only a break of either level would see the new ground. Likely range until the ECB 1.1890-1.1940.
USD/CAD – slumped to a overnight low of 1.2136 from 1.2375 immediately after the BOC announcement. Which suggests no one saw it coming. Only 6 out of 26 economists predicted the rate rise. USD/CAD then rallied back to close down 1.15% at 1.2225. Immediate resistance can be found at 1.2310 and then 1.2380. Short term support lies at 1.2200 and 1.2185. Speculators were actually short Canadian Dollars then. Likely range 1.2180-1.2310.
AUD/USD – closed around the 0.80 cent mark. Metals prices were once again higher and this should support the Aussie. AUD/USD traded to an overnight high of 0.8021. Immediate resistance today lies at 0.8020 and then 0.8050. There is short term support at 0.7980 and then 0.7960. Today sees Australian Trade Balance and Retail Sales data. Australia’s trade surplus is forecast to gain to between AUD 875 and 930 million from AUD 865 million. Only a much lower figure could see the Aussie under 0.7960. We would need to see a more broad-based Dollar move to set the Aussie in a clearer direction. Likely range 0.7980-0.8020.
GBP/USD – not much change, likely range 1.3000-13050
USD/JPY – risk aversion diverted for now. The higher US bond yields should be supportive of the Dollar. Immediate resistance lies at 109.40/50. There is good support found at 109.00 and 108.80. Likely range today 108.80-109.30
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