The Canadian dollar pounced on a softening dollar and higher oil prices yesterday to reach the top of its recent trading range. However, with the level of resistance mounting, the loonie failed to hold onto its gains and ultimately posted minor losses for the trading session. This morning, USDCAD trades relatively flat with WTI trading a third of a percentage point lower. Trading above $30 a barrel, many analysts are warning that the oil rally may begin to peter out. With economies opening back up and demand conditions improving, eyes will be on the market moving Department of Energy US inventory data released at 15:30 BST today. Yesterday’s release of the API figure, which is less of a market mover, saw inventories fall by 4.8m barrels. Also in the calendar for CAD today is April’s CPI data at 13:30 BST, with expectations of headline inflation falling to 1.9%, while the Bank of Canada’s Tim Lane gives a speech tonight at 19:00 BST. Inflation data for April is unlikely to be a market moving event considering central banks are currently focused on economic growth and the labour market. With expectations low for any interest rate adjustments, the inflation data is unlikely to move currency markets for some time.
The dollar spent another session declining yesterday as optimism was plentiful in markets. Little reaction from China over the latest Huawei restrictions has reduced the markets’ concerns over a potential re-emergence of the trade war, while news that Moderna had positive preliminary trials boosted sentiment. Despite Moderna’s stock dropping 10% upon close, following a report from Stat which highlighted the lack of a press release from its partner the US National Institutes of Allergy and Infectious Disease, risk appetite remained well supported. Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin’s appearance in front of the Senate Banking Committee drew most of the headlines for the dollar yesterday. After the House backed an additional $3trn Democratic economic stimulus bill on Friday, tensions within Senate rose. Republicans are erring on the conservative side, opting for a slower approach to supporting the economy, while the Democrats are eager to get their latest bill across the line. Despite Powell calling for increased fiscal stimulus in the last week or so, he answered a question by Democrat Brian Schatz in an attempt not to delve into politics. “I make my comments on fiscal policy on a general level and I’m reluctant to talk about timing and specific provisions”, Powell answered in response to questioning by Democrat Brian Schatz. The only other notable piece of news was the decline in US home construction. Data released yesterday for April showed residential starts plummeted by 30.2%, its largest fall on records dating back to 1959, as the lockdown hammered the housing market and broader economy. Today, the dollar is trading mixed against the G10 ahead of tonight’s FOMC meeting minutes, released at 19:00 BST.
The euro closed only slightly higher than its opening price, although it did reach highs not seen since the beginning of May against the dollar. European economic sentiment significantly improved according to the ZEW data release, which showed that economic sentiment in the eurozone rose to 46 in May, well above the forecasted median of -12.1. For Germany, economic sentiment improved from 28.2 in April to 51.0 in May. Today, the European Central Bank’s loan package known as PELTRO will be allotted with an interest rate 25 bps below the ECB’s main refinancing operations that currently stands at 0%. This should further support liquidity conditions in the euro area money markets, possibly pushing the EURIBOR fixing lower and in turn, lower interbank risk as the FRA-OIS spread would be pushed lower as well. Today, the European Commission publishes economic policy recommendations for individual member states, but markets also keep their eyes open for eurozone inflation figures at 10:00 BST and consumer confidence at 15:00 BST.
Sterling traded mixed throughout the day yesterday but managed to close at its highest point in a week against the US dollar and almost two weeks against the euro. A weaker dollar remained a key driver in sterling’s recovery as risk sentiment remained supported, while the pound found support in better-than-expected employment data for March. This morning’s data saw UK inflation reach a 4-year low in April, printing worse than expected at 0.8% YoY. The pound pared back yesterday’s rally on the news and remains at the bottom of the G10 currency board this morning. In Brexit news, the UK’s chief Brexit negotiator David Frost wrote a letter of complaint to his EU counterpart Michel Barnier, outlining that the bloc is offering the UK a “low-quality” trade deal and told him to think again. Frost wrote that “what is on offer is not a fair free-trade relationship between close economic partners, but a relatively low-quality trade agreement coming with unprecedented EU oversight of our laws and institutions.” So far, the negotiation talks have seemed to reach an impasse, and Frost’s letter to Barnier is likely to amplify the ongoing tensions, leaving the pound in an uncertain position ahead of the extension deadline. Markets will now focus on the testimony by the Bank of England’s Governor Andrew Bailey at the Treasury Committee at 14:30 BST, while concerns about the stale-mate Brexit talks keep looming over sterling’s price action.