U.S. Dollar poised to depreciate if Bank of Canada hikes rates
The U.S. Dollar stuck to familiar levels against its major
counterparts, while conceding significant ground to the South African Rand
after stellar Gross Domestic Product growth of 2.5% for the second quarter. Oil markets are trying to mount a
comeback based on the potential of OPEC succeeding in convincing nations to
deepen their cuts to production and adding Nigeria as well as Libya to a
curtailing plan since they were not originally included in the first agreement.
Petro-currencies such as NOK, MXN, and CAD have not been affected tremendously
as North American production has changed the oil game.
Political headlines are plenty, but this
has not affected the FX markets. Curiously enough though, the revelation of
e-mails allegedly linking Donald Trump Jr. and a Russian with information
potentially damaging to Hillary Clinton’s campaign sank stock markets temporarily
as traders took about 20-30 minutes to digest the news. Unfortunately, this
plays poorly for the greenback’s image as it distracts the administration from
working on their economic agenda. Fed Chairwoman Janet Yellen will be speaking
to the congressional Housing Committee today, which could produce statements
with some impact.
The Canadian Dollar is trading around its strongest levels since
September 2016 and could reach new highs if the Bank of Canada decides to
tighten monetary policy for the first time since 2010. Chances of a hike are at 87.0%. Policy
divergence, meaning the Fed’s ability to raise interest rates in recent times
while other central banks could not afford to, has faded as a source of
appreciation for the buck.
Recently, central bank officials across
the industrialized world are indeed looking to reduce easing tools and are
considering hiking their benchmark rates as well. If the BOC acts, the trend
of global monetary contraction will be established and the greenback could
suffer major damage. BOC President Stephen Poloz characterized the Canadian
economy as stable and that the strong growth of Q1 may moderate, but the
positive momentum in the non-energy sector is sustainable. The decision will be
announced at 10AM with a press conference to follow.
The Pound is slightly down this morning following disappointing
wage growth. The unemployment
rate fell to 4.5%, which is the lowest level since 1975, but considering high
inflation at 2.5% and nominal earning up just 2.0%, real wages fell by 0.5%.
The economic consequences of this are weighing on Sterling since it could mean
that future consumption and investment will suffer as a result of people taking
home less income. Furthermore, a voting member of the Bank of England, Ben
Broadbent, spoke of his will to keep an accommodative environment and vowed to
vote against any hikes in the near future.
With Brexit negotiations focused on a trade deal prior to paying
any tolls to the EU, anxiety is growing and concerns over jobs continue as more
firms are lured by other EU capitals to host their offices and operations
currently in London.
Paris is said to be making quite a pitch, thus reminding many companies how
every peace treaty and major agreement has been signed there for a reason: it’s
Paris. You want to be there.