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US dollar gains momentum

CAD - Canadian Dollar

Support for the US dollar gained strength yesterday while equity markets wobbled after record highs. Demand of USD pushed USDCAD over 1.28 yesterday, the first time since Dec. 28.

The US dollar extended last week’s gains through trade on Monday, lifted by a falling euro and expectations for an increase in fiscal support. Having touched near three-year lows at the beginning of last week the narrative has shifted through the last three sessions as investors begin to move away from inflation and monetary policy expectations. Hopes for a vaccine have led the rebound and higher treasury yields. With Democrats now controlling both the House and the Senate, markets are beginning to price in an increase to pandemic relief. While additional government spending would ordinarily hamper US dollar gains, widening treasury yields have helped cap losses and drive dollar support. While the shift in direction has not yet undermined the broader downward narrative there is now scope to suggest the US dollar could recouping losses through the medium term.

Key Movers

The euro moved toward 3-week lows, giving up highs above 1.23 to shift to session lows at 1.2154. The sell-off in the euro has come about from tighter restrictions and an uptick in cases. Germany has declared much tougher restrictions, while other countries are projected to follow suit. A euro sell-off is entirely possible over the next few weeks, as the tighter restrictions take their toll economically.

UK ministers have continued to warn of the severity of the second wave, and the potential impact it may have on the economy moving forward. The UK’s chief medical adviser said that the next few weeks will be the worse and that stricter regulations may have to come into play in February to offset the virus further. Chancellor of the Exchequer Rishi Sunak said that the UK economy must first get worse, before improving. He also praised the City of London and its workers and suggested it will once again start booming once the virus has been eradicated.

The Australian dollar retreated through trade on Monday, giving up almost 2% to slip below 0.77 US cents. With little of note on the domestic docket the AUD succumb to broader US dollar strength as investors looked to correct positions on widening US treasury yields and expectations for increased Fiscal support. Having touched near three-year highs last week the AUD has come under some selling pressure as investors trim US dollar bearish bets. With sentiment changing, a run toward 0.80 through Q1 may be harder won.

Expected Ranges

EUR/CAD: 1.548 - 1.554 ▼

GBP/CAD: 1.725 - 1.739 ▼

AUD/CAD: 0.983 - 0.986 ▼

USD/CAD: 1.273 - 1.278 ▼