The Canadian dollar fell off the proverbial cliff overnight. The currency started sliding Tuesday and continued to do so after the U.S. Federal Open Market Committee minutes indicated policymakers talked about tapering. Traders took that as a sign that although it may not be “last call” for the easy money era, the bartender kept a close eye on the clock.
Traders were already concerned after recent Consumer Price Index reports showed inflation rising well above expectations, which they believed meant the Fed would need to raise interest rates sooner than expected. The FOMC minutes revealed that some policymakers shared the view. It was noted that “various participants somewhat earlier than they had anticipated at previous meetings in light of incoming data.”
They were worried that elevated inflation readings might persist longer than expected.
Several participants said they expected the conditions required to raise rates would be met somewhat earlier than they projected in March.
The minutes had a delayed impact on Wall Street, where equity indexes closed at record highs. Those levels were not seen in overnight. The Dow Jones Industrial Average is poised to open over 450 points lower. The major European equity indexes have dropped around 2.0%. US 10-year Treasury yields fell to 1.266% before inching higher to 1.28% in NY trading.
Oil prices dropped as the US dollar rallied, falling from yesterday’s peak of $74.75/barrel to $70.80/b, a drop of 5.3%. Traders are concerned that the prospect of higher US interest rates will slow the global economic recovery, and reduce oil demand.
Traders are also worried that the UAE may circumvent production targets set by the Organization of the Petroleum Exporting Countries.
USD/JPY plummeted due to the steep drop in Treasury yields, falling from 110.67 to 109.73. The Bank of Japan is reportedly considering downgrading its 2021 growth forecast.
EUR/USD recovered losses following the FOMC minutes, rising from a low in Asia of $1.1785 to $1.1837 at the New York open, partly due to gains in USD/CNY, on concerns that the People’s Bank of China will adopt a dovish tack. A result of the European Central Bank Strategy Review is that they will tweak the inflation mandate from “below, or close to 2.0%” to just 2.0%. The intraday EUR/USD downtrend is intact below $1.1870.
Canadian dollar traders are looking ahead to Friday’s Labour Force Survey. The loonie may find support if new jobs exceed the forecast of 195,000.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians