The dollar rose against all G10 FX peers yesterday, with the exception of the $-bloc currencies (AUD, NZD, CAD), which benefitted from a combination of rising hawkish bets on domestic central banks and a supportive commodity environment. A key driver of USD strength yesterday was the sharp rise in US bond yields – which was exacerbated by Fed’s Lael Brainard comments about the prospect of starting quantitative tightening “at a rapid pace” already at the May meeting. Incidentally, markets are finding more comfort in placing the peak of the Fed’s hiking cycle around or slightly above 3.0%. Brainard’s comments likely put more emphasis on the theme of quantitative tightening ahead of today’s March FOMC minutes, where indications of wide consensus within the committee to shrink the balance sheet at a fast pace could keep bonds vulnerable and support the dollar.
Higher oil futures versus higher treasury yields. That’s the dilemma for USD/CAD. Today, Canada will release March PMI. CAD has nudged a little higher through overnight trade, reflecting the broader bid for commodity FX amid firmer crude prices while the Ukraine conflict is expected to add to upward pressure on prices. The outlook for tighter monetary policy in the coming months now has consensus across all the major Canadian banks that the BoC will lift the Overnight Target Rate 50bps next week. Rising rates and a more aggressive rate stance from the BoC will help support the CAD against the USD.
EUR/USD has broken below 1.0900 this morning. The fundamental justification for a weaker euro remains strong given the recent shock to the eurozone’s terms of trade, it is also true that there is mounting geopolitical risk currently being priced into the common currency. On the one hand, a new round of sanctions on Russia are expected to be announced today by the US and the EU, with any implications for energy exports likely to keep the euro under pressure. When adding the potential negative spill-over from new sanctions against Russia, we see the risks to EUR/USD skewed towards the 1.0750/1.0800 area into the weekend. On the data side, the eurozone calendar is quiet today, with some focus however on speeches by ECB’s Guindos and Lane.
The GBP has fully reversed its earlier rally with the GBP/USD now trading at 1.3080. The GBP may continue to edge lower on the back of good dollar momentum and negative impact on GBP from new sanctions against Russia. There are still no domestic drivers to GBP today.
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