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Daily Currency Update

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Canadian Dollar May Strengthen A Bit More

USD - US Dollar

Almost a month since the start of the Ukraine war, the USD is stuck in a limbo of sorts. The currency has clearly outperformed the low-yielding currencies of energy importers like the JPY and EUR but also underperformed the high-yielding currencies of energy exporters - the AUD and CAD. It seems that the traditional model where the USD outperforms when the Fed is leading the global tightening cycle or when risk aversion drives investors has been replaced by a new market paradigm which centres on the relative commodity terms-of-trade of the G10. On the day, focus will be on the speeches by Fed’s John Williams, Mary Daly and Loretta Mester as well as the war in Ukraine.  Today’s FOMC speeches will drive direction. 

CAD - Canadian Dollar

The CAD has broken well below 1.26 to start the day. High oil prices are providing some support for the CAD but the broader relaxation in market volatility is helpful in underpinning the CAD near recent range lows. There is little new news to focus on for the CAD on the domestic front today which leaves the loonie at the mercy of the external environment and the USD in the short run. Strong domestic growth trends (strong Retail Sales data keeps Q1 GDP tracking well above 5%), rising interest rates, and firm commodity prices point towards the CAD remaining firm—and strengthening a bit more. Observe the foreign exchange rates.

EUR - Euro

EUR/USD has dipped sub 1.10 could fall further. For today, we have six European Central Bank speakers and the January eurozone current account data. Eurozone January trade data was terrible for the eurozone and is also on the wrong side of the fossil fuel surge. The flexibility of the euro now means that the eurozone is paying even more for its imported energy - a development the ECB is starting to brief against. In reality, tighter monetary policy (not FX intervention) is the only credible tool available to the ECB to fight euro weakness. Let's see if they are prepared to use it. Given the momentum behind the move in US interest rates, we could easily see EUR/USD pressing the recent 1.0800 low over coming sessions.  

GBP - British Pound

GBP has been outperforming in Europe. Its strength, despite last week's dovish hike by the BoE, is a reminder that continental Europe faces the same, if not worse pressure from the current energy shock.  In focus over coming sessions is the UK Chancellor's spring statement (tomorrow). There is much press speculation over support measures such as a cut in fuel duties, increases in national insurance thresholds, and more generous corporate tax breaks to encourage investment. That the UK's fiscal position has some room to support the economy may provide a little more room for the Bank of England to hike. Money markets have re-priced the BoE's Bank rate back to 2.20% for the year. For now look for the GBP to remain better supported than the euro. 

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