FX168 Financial News Agency (North America) News On Monday (November 20), after experiencing its largest weekly decline since July last week, the US dollar started a new week by maintaining its downward trajectory. Recent economic developments have produced bearish signals, with losses over the past few sessions intensifying and accelerating amid weaker-than-expected U.S. inflation data and disappointing initial jobless claims, pushing the U.S. dollar index today to its lowest level since September. The lowest ever touched 103.38. The Canadian dollar strengthened as crude oil prices recovered from four-month lows as risk sentiment rebounded in the stock market. CAD/CNY returned to the 5.20 range and is currently at 5.2193, down 0.74%.
The U.S. dollar index is currently at 103.50, down 0.31%.
(USD Index trend chart, source: FX168)
The weakening price pressures, combined with a slowing labor market, have all but eliminated the possibility of further tightening by the Federal Open Market Committee, weakening the argument for keeping interest rates higher in the longer term. Against this backdrop, U.S. Treasury yields have fallen sharply this month, with the 10-year Treasury yield around 4.45%, compared with 4.95% at the end of October.
The downward trajectory in bond yields is unlikely to end anytime soon. As the effects of past Fed rate hikes continue to ripple through the real economy, business activity will cool further and oil prices are at multi-month lows, inflation should fall faster than expected, putting pressure on the Treasury curve. This in turn will put pressure on the US dollar.
Today, the U.S. Treasury Department issued a $16 billion 20-year new bond with a winning bid yield of 4.780%, which was lower than the pre-issuance trading level of 4.790%. Afterwards, the long end of the U.S. Treasury yield curve rebounded, and the yield for the same period turned down by about 2 basis points. The long end performed well, pushing the 5s30s spread to a new intraday low, flattening 2 basis points on the day. The allocation ratio for primary dealers was 9.5%, which was lower than the previous value. The allocation ratio for indirect bidders rose to 74.0%, while the allocation ratio for direct bidders was 16.5%. This move will help boost the U.S. bond market. Moody’s said structural demand for U.S. bonds remains strong.
After last week’s lower-than-expected inflation data, investor sentiment has stabilized, and the market is now generally convinced that the Federal Reserve has ended raising interest rates. As a result, the market has turned its attention to when the Federal Reserve will start cutting interest rates.
Although Fed officials have made dovish comments recently to support a weaker dollar, markets have not yet fully priced in officials’ statements that they may restart tightening policy if necessary. “The dovish minutes could trigger some downside risks to the dollar,” said Ricardo Evangelista, senior analyst at ActivTrades.
Barkin, a hawkish Fed official who is president of the Richmond Fed and a member of the Federal Open Market Committee, is the latest Fed official to support further tightening of policy to curb high inflation. More recently, he said interest rates may need to peak at higher levels for longer to keep inflation in check. On Monday, Barkin said the work against inflation was not yet done. He said U.S. economic data showed the economy was expanding while price growth was slowing, but that progress was not enough for the Fed to declare victory in the fight against inflation. He said the message he’s hearing is that the economy is normalizing, but he believes inflation will remain high, giving him reason to believe interest rates will remain high for longer. “Overall, core inflation data showed a good decline,” he said. “We continue to view inflation as stubborn, which supports the stance of keeping rates higher for longer.”
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In terms of the U.S. domestic economy, U.S. Treasury Secretary Janet Yellen pointed out on Monday that the prices Americans pay for food and rent today continue to rise compared with pre-epidemic levels, which is a major factor in voters’ negative view of the economy. Yellen said in an interview with the media on Monday: “Although the overall pace of price increases is slower, Americans are still seeing prices for some important commodities, including food, rise from pre-pandemic levels. For people who go to stores to shop, It’s still worth noting.”
However, there is currently little data on dollar demand to suggest it is surging. And, as oil prices fell this week, the OPEC meeting decided to cut oil supply, which may lead to short-term reactive buying of the US dollar.
At present, it seems that the world’s economic and political issues have been changing recently, risk appetite has increased, and the U.S. dollar index has now entered a downward trend.
As the view that the Fed will transition into a rate-shifting phase gains traction, there are still some signs that the Fed may start cutting interest rates sooner, affecting risk appetite. at the same time,
Looking ahead, there are no major releases on the U.S. economic calendar in the coming days, with minutes from the Federal Reserve’s last meeting expected to be released on Tuesday, which are expected to have limited impact on the dollar given last week’s trends. In addition, the October durable goods report, initial jobless claims, and the University of Michigan’s consumer confidence index to be released on Wednesday may attract some attention. Weak data can spell trouble for the dollar, while strong data can have the opposite effect.
The trading cycle will be shortened due to the Thanksgiving holiday. The absence of dramatic events could mean recent market moves will consolidate, paving the way for further pullbacks in yields and the dollar. This, in turn, could translate into further gains for risk assets.
USD/CAD is currently at 1.37312, an increase of 0.09%.
(USD/CAD exchange rate chart, source: FX168)
Analysts at Scotiabank note that on USD/CAD fundamentals, “risk appetite remains the strongest driver of Canadian dollar performance from a correlation perspective.” Meanwhile, any rebound in oil prices, and Any upside surprise in Canadian inflation data is already expected and could provide some support to the Canadian dollar in the coming days. What is more obvious is that the recent continued rise in crude oil has supported the trend of the Canadian dollar.
The crude oil market rose on Monday, with gains exceeding 2.3%, helping the Canadian dollar reverse its downward trend.
Currently, the Canadian dollar has been under pressure for several weeks and has performed extremely poorly in the G10 complex in more than a month due to the decline in global crude oil prices.
Commonwealth Bank strategist Kristina Clifton said the Canadian dollar will remain heavily influenced by oil prices, and any OPEC-led oil price recovery will be an exciting week from the Canadian dollar’s perspective. “Another decline in Canadian inflation would reinforce our view that the Bank of Canada’s policy rate has peaked,” Clifton said.
In Canada, Tuesday’s Canadian Consumer Price Index (CPI) data is the focus of Canadian dollar traders, followed by manufacturing data on Wednesday and retail sales data on Friday.
RBC Economics expects “year-on-year CPI growth to slow sharply to 3.1% in October from 3.8% in September (slightly above the upper end of the Bank of Canada’s 1% to 3% inflation target range). Falling gasoline prices push energy lower Costs, supply chain easing and the lagged impact of lower food commodity prices continue to slow grocery store price growth. The Bank of Canada can do little to influence global commodity prices, and price growth excluding food and energy products is expected to be more “sticky,” with year-on-year increases from It edged up to 3.3% from 3.2% in September. “
Wells Fargo said, “Favorable CPI results in October will support a continued pause in policy rates and a possible peak in policy rates. The combination of lower energy prices in October and a favorable base effect is expected to lead to headline inflation in October from 3.8% in September.” Slowed sharply to 3.2%. Equally important, central bank policymakers and market participants will also be looking for a slowdown in the pace of core inflation. The three-month annual average growth rate of the central bank’s core inflation measure slowed to 3.67% in September. If October’s data declines to the 3.0%-3.5% range, we believe this will reinforce the case that policy rates have already peaked. We believe a modest deceleration in inflation will also allow the Bank of Canada to lower policy rates starting around the middle of next year. “
Shaun Osborne, an analyst at Scotiabank, said that from a short-term perspective, the technical situation of the Canadian dollar remains very unstable. But the sharp decline in spot prices over the past month does not diminish the significance of the huge bearish reversal signal on the weekly chart that formed earlier this month. He said USD/CAD’s reversal from last week’s highs near 1.3775 is showing some signs of technical momentum, favoring the Canadian dollar on the intraday charts. He said the exchange rate should find firm resistance around 1.3750/60 intraday, and a broader decline in the U.S. dollar over the next few days should mean USD/CAD will once again see key support at 1.3655/60. “A move below this level should push the Canadian dollar towards the 1.34/1.35 range in the short term,” Osborne said.
Economists at Danske Bank believe that USD/CAD will remain bullish over the next three to 12 months. He said, “The Bank of Canada will keep policy rates unchanged until the first quarter of 2024. We maintain a bullish view on USD/CAD over the next 3 to 12 months. Nonetheless, in the near term, due to weak U.S. data And with markets pricing in a first interest rate cut in March, the U.S. dollar overall is at risk of further pullback. This could benefit the Canadian dollar, although not as much as other cycle-sensitive currencies. We expect the Bank of Canada to keep policy rates on hold until The first quarter of 2024 is when we expect to see the first rate cut. If cross rates continue to fall, this may require stronger global growth than we expect, or force a sharp easing of global monetary conditions, including a depreciation of the dollar. Landing’.”
CAD/CNY returned to the 5.20 range and is currently at 5.2193, down 0.74%.
(Canadian dollar/RMB exchange rate trend chart, source: FX168)