The Canadian dollar is sifting through the collateral damage following the post-Federal Open Market Committee (FOMC) shift into risk aversion. The forecast of two rate hikes in 2023 in the Fed’s Summary Economic Projections (SEP) in the June dot-plot compared to zero rate hikes in the March dot-plots sparked a massive unwind in positions of the so-called “risk assets.” Commodities are one of those assets, and the Canadian dollar is often considered a commodity currency.
Fed Chair Jerome Powell admitted that the Fed would soon begin discussions about tapering quantitative easing purchases, which was another cause for consternation.
Tapering means reducing bond purchases which in theory suggests higher interest rates.
The news crushed the Canadian dollar. USD/CAD traded at $1.2150 just before the Fed announcement and touched $1.2486 in Asia overnight.
A litany of woes combined to sink the Canadian dollar. Commodity prices were falling from recent highs due to Chinese measures to curtail commodity speculation, and the FOMC statement exacerbated the plunge. U.S. equity prices were below record peaks, and steep losses fueled risk aversion sentiment in other asset classes. The forecast of two rate hikes meant Canadian, and U.S. interest rate differentials shifted to favour the U.S.
Nevertheless, the Canadian dollar losses may be overdone. The Bank of Canada (BoC) was one of the first major G-10 central banks to suggest interest rates would rise sooner than anticipated and rising inflation was one reason.
The Fed rate hike forecast was driven by speculation that U.S. inflation would rise higher, and last longer than originally anticipated. Arguably, if U.S. inflation is rising rapidly, Canadian inflation will follow suit. If so, the BoC will raise interest rates as quick or quicker than the Fed.
The U.S. dollar is giving back some of last week’s gains in early New York trading today. EUR/USD is trading with a bit of a bid tone, rising from $1.1849 to $1.1899.
GBP/USD is getting a bit of a boost from news the Fitch Ratings upgraded UK debt from AA-Negative to AA-Stable. The currency pair climbed to $1.3886 from $1.3787.
USD/JPY fell to 109.73 before recovering all losses as earlier safe-haven demand gave way to fresh risk sentiment.
AUD/USD and NZD/USD recouped Asia losses on the back of profit-taking, and a broad improvement in the global risk tone.
There are no economic reports from Canada or the U.S. today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians