USD / CAD at 1.30?
Today’s US economic reports reminded investors of the lure of the dollar. The job market is strong and the Federal Reserve will actively cut stimulus this year, pushing rates higher. Ten-year Treasury bill yields topped 1.7%, tying a two-year high. According to the minutes of the last Federal Reserve meeting, many participants felt that the balance sheet could be reduced at a faster pace and that the conditions for a rate hike could be in place sooner if inflation remains high. and whether the improvement in the labor market continues. After falling in December, oil prices have rebounded sharply over the past 3 weeks and the labor market is healthy, with ADP reporting its biggest increase in private payrolls last month since May. It was therefore not surprising that the dollar bulls kept control, with the greenback recovering its losses overnight against the Japanese yen and the euro. Commodity-linked currencies were the hardest hit by dollar gains and massive sell-offs of equities. The markets are finally considering the effects of rate hikes this year.
Meanwhile, attention is drawn to Friday’s jobs report. The publication of the non-manufacturing ISM is expected tomorrow and the employment component of this report is one of the strongest leading indicators for non-farm payrolls. With ADP up 807,000 in December, investors expect a strong report. If their point of view is reinforced by tomorrow’s ISM, we will see the greenback extend its gains to NFPs.
The weakest currency today was the Canadian dollar. Despite a sharp rise in building permits (nearly four times more than expected), the intoxicating real estate market could cool down as house prices rise at a slower pace. It’s a big week in North America, with the Canadian dollar being as much the center of attention as the greenback. The country’s trade balance is due to be released tomorrow along with labor market figures on Friday. Job growth is expected to slow significantly after the country created 153,000 jobs in November. USD / CAD is trading higher on expectations of stronger US job growth and weaker job growth in Canada. The restrictions are also back in Canada. A curfew has been announced for Quebec, restaurants can only offer take-out or delivery meals and gatherings are no longer allowed. Ontario has also closed indoor restaurants, limited capacity and reduced gatherings. These restrictions will slow the recovery and reduce demand for the loonie, putting the USD / CAD on a path towards 1.30.
European currencies recovered on Wednesday despite downward revisions to euro area PMIs. Infections are at record levels, but countries like Germany, France and Belgium are relaxing quarantine rules. In recent days, Belgium has exempted close contacts vaccinated from quarantine, France has shortened its isolation period for positive patients from 10 to 7 days and can end isolation after 5 days if they are negative without symptoms for 48 hours. Today, the German Ministry of Health also recommended reducing the quarantine period to 7 days instead of 14 days. This is more in line with advice from the US Center of Disease Control regarding a 5-day isolation for asymptomatic patients. The UK announced today that fully vaccinated travelers no longer need to submit a PCR test on arrival (a rapid negative within 48 hours is sufficient). Investors applaud these efforts to reopen the economy by pushing up the euro and pound sterling.