The Canadian dollar falls to its lowest level in almost two years
Tuesday 20 September, 2022
Daily Currency UpdateThe Canadian dollar falls to a one-year and 10-month low versus the USD, at 0.7476 (or USDCAD = 1.3375). The fundamental catalyst came from inflation numbers because it slowed in August, with headline CPI coming in at 7% versus an expected 7.3% as lower gasoline prices offset rising food costs. CPI core measures also slowed as well to 5.2% from the 5.5% expected.
The Bank of Canada is going to like today’s inflation reading. The interpretation is that Canadian overnight rates might not need to go much higher than the 3.75-4.25% range, which allows yield differentials between the US and Canada to drop a bit (government fixed income instruments), so the USDCAD pair has pressure to the upside.
However, inflation numbers today might not be enough to derail the Bank of Canada from further hikes in the coming weeks, but at the end of this global hiking rate cycle, the rate in Canada is likely to be lower than in the US. That might cause the CAD to be weaker than the USD over the following few days.
Key MoversThe US dollar index, DXY, is up 0.6%, and it is acting as a safe haven in today’s session as market participants increase their expectations following a total percentage point increase by Sweden’s central bank from 0.75% to 1.75%. The Nasdaq 100 and S&P 500 indices fell 1% and 1.4%, respectively.
In Germany, August producer prices increased +7.9% vs +2.4% expected, which is the highest monthly increase following an increase in July due to a rise in energy prices. However, the Euro was under pressure following a report that Russia may look to annex parts of the Ukraine. The EURUSD pair trades between 0.9955 and 1.0051 today.
According to Bloomberg, European Central Bank President Christine Lagarde said borrowing costs will rise more in the months ahead, even after officials front-loaded initial moves in what she called, “...the fastest change in rates in our history.”
In APAC countries, Japanese inflation came in on the upside as well. The Bank of Japan policy meeting is this week; the statement is due on Thursday, 22 September. The USDJPY pair trades between 142.94 and 143.92 at the time of this writing.
People’s Bank of China’s setting of the 1- and 5-year Loan Prime Rates (LPR) came in as expected at 3.65% and 4.3% for 1 and 5-year loan prime rates, respectively. These remain unchanged, as was widely forecast.
In Australia, the Aussie dollar trades weaker today, between 0.6677 and 0.6746. Early today, bond yields in Australia declined after minutes from the RBA’s September meeting showed the central bank is getting closer to “normal settings”, which might mean that the Reserve bank of Australia won't increase overnight rates as much as its counterparties such as the Fed in the US or the BoC in Canada. The unexpected rise in the August unemployment rate in Australia supports the idea that the RBA might not be so hawkish after all. If the RBA delivers a 5th consecutive 50 bps increase, the expectation is that it might be one of the last in this hiking cycle.
- EUR/CAD: 1.3259 - 1.3333 ▲
- GBP/CAD: 1.5130 - 1.5226 ▲
- AUD/CAD: 0.8899 - 0.8946 ▲
- USD/CAD: 1.3229 - 1.3373 ▲