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| Canadian Dollar Strengthens Ahead of US CPI Release |
The Canadian dollar traded cautiously overnight, as traders awaited the release of the US inflation data for February. The CPI is expected to fall to 6.0% year on year (YoY) from 6.4% YoY in January, while the Core-CPI is expected to remain unchanged at 0.4% month on month (MoM). The US Federal Reserve's (Fed) terminal rate is expected to fall, as the CPI report was expected to determine the size of the next rate hike and provide a better idea of the Fed's terminal fed funds rate.
According to analysts, a hotter than expected CPI reading would really confuse traders. US 2-year Treasury yields experienced the biggest one-day drop since the 2008 financial crisis yesterday, thanks to a tsunami of safe-haven demand and concerns that the Fed will soften its rate hiking policy. Economists and analysts are quickly revising their outlooks for next Tuesday's Federal Open Market Committee (FOMC) meeting. Nomura Securities predicts that the Fed will cut rates by 25 basis points, while Goldman Sachs and Barclay's Bank predict that the Fed will leave rates unchanged.
The Canadian dollar is strengthening against the US dollar due to broad US dollar weakness and a repricing of the US interest rate path. Canadian bond yields fell alongside their US counterparts on Monday. The Government of Canada's 2-year yield fell by 42 basis points, leading some analysts to predict that the Bank of Canada will cut rates at its April meeting. The USDCAD slide is getting some tracking with the break below the 1.3700–10 area, suggesting further losses to 1.3660 support. A break below that level targets further losses to 1.3500.
EURUSD traded in the 1.0680-0.0732 range, with prices supported ahead of Thursday's European Central Bank (ECB) meeting. A 50 basis point rate hike is still expected. GBPUSD traded narrowly in a 1.2143–1.2187 range, supported by UK employment data. The unemployment rate ticked down to 3.7% for the months ending in January, compared to 3.8% previously. Wage growth also slowed a tad, with average earnings ex-bonus at 6.5% YoY compared to 6.7% previously. USDJPY rallied choppily, rising from 133.04 to 134.33 due to the rebound in the US 10-year Treasury from the 3.50% low in Asia to 3.60% in NY. AUDUSD drifted in a 0.6633-0.6671 range. The upside was capped after Consumer and Business Confidence data was weaker than expected.
