The dollar enjoyed a corrective rally yesterday, rising mostly against European currencies as market fears about a gas crunch in Europe rose further. Also contributing to the dollar move were some shockwaves sent across equity markets from US earnings jitters, and possible market positioning ahead of today’s FOMC. We don’t believe any dollar correction will have legs, as we expect a hawkish message by the Fed accompanying what we think is a well-telegraphed 75bp hike. This move should continue to put a floor under the dollar over the coming weeks. The external environment, in particular, suggests that any post-FOMC dollar weakness may be extremely short-lived as global risk sentiment remains unstable and Europe’s gas-related troubles continue to argue in favor of a dollar consolidation or further strengthening.
The US dollar recorded a new low for the month yesterday against the Canadian dollar slightly above CAD1.2815 but recovered by to CAD1.29 by the end of the end of the session. With the stronger earnings/guidance lifting US equity futures the greenback has drifted steadily lower today to test the CAD1.2850 area. Energy and metals prices are firmer on the session. The CAD seems to have taken its cue from the slide in the EUR and the broader lift that it provided for the USD. Given the event risk facing markets today with the FOMC, the broader USD tone is likely to remain a key factor in setting the CAD direction in the short run.
The euro has come under pressure as Russia is reportedly planning to keep squeezing gas flows into Europe, keeping them at minimal levels as long as the standoff over Ukraine persists. Meanwhile, EU members agreed on emergency plans based on a 15% gas consumption cut. The message that is being conveyed to markets is that what used to be a black swan risk has now morphed into a very tangible and constant threat. A complete shutdown of gas supply from Russia to the EU is looking much more likely, and something that is unequivocally being priced into European assets. On the domestic side, there are no market-moving data releases in the eurozone today.