U.S. Dollar Poised to Depreciate if Bank of Canada Hikes Rates

 

USD

The U.S. Dollar stuck to familiar levels against its major counterparts, while conceding significant ground to the South African Rand after stellar Gross Domestic Product growth of 2.5% for the second quarter. Oil markets are trying to mount a comeback based on the potential of OPEC succeeding in convincing nations to deepen their cuts to production and adding Nigeria as well as Libya to a curtailing plan since they were not originally included in the first agreement. Petro-currencies such as NOK, MXN, and CAD have not been affected tremendously as North American production has changed the oil game.

Political headlines are plenty, but this has not affected the FX markets. Curiously enough though, the revelation of e-mails allegedly linking Donald Trump Jr. and a Russian with information potentially damaging to Hillary Clinton’s campaign sank stock markets temporarily as traders took about 20-30 minutes to digest the news. Unfortunately, this plays poorly for the greenback’s image as it distracts the administration from working on their economic agenda. Fed Chairwoman Janet Yellen will be speaking to the congressional Housing Committee today, which could produce statements with some impact.  

 

CAD  

The Canadian Dollar is trading around its strongest levels since September 2016 and could reach new highs if the Bank of Canada decides to tighten monetary policy for the first time since 2010. Chances of a hike are at 87.0%. Policy divergence, meaning the Fed’s ability to raise interest rates in recent times while other central banks could not afford to, has faded as a source of appreciation for the buck.

Recently, central bank officials across the industrialized world are indeed looking to reduce easing tools and are considering hiking their benchmark rates as well. If the BOC acts, the trend of global monetary contraction will be established and the greenback could suffer major damage. BOC President Stephen Poloz characterized the Canadian economy as stable and that the strong growth of Q1 may moderate, but the positive momentum in the non-energy sector is sustainable. The decision will be announced at 10AM with a press conference to follow.      

 

GBP  

The Pound is slightly down this morning following disappointing wage growth. The unemployment rate fell to 4.5%, which is the lowest level since 1975, but considering high inflation at 2.5% and nominal earning up just 2.0%, real wages fell by 0.5%.

The economic consequences of this are weighing on Sterling since it could mean that future consumption and investment will suffer as a result of people taking home less income. Furthermore, a voting member of the Bank of England, Ben Broadbent, spoke of his will to keep an accommodative environment and vowed to vote against any hikes in the near future. 

With Brexit negotiations focused on a trade deal prior to paying any tolls to the EU, anxiety is growing and concerns over jobs continue as more firms are lured by other EU capitals to host their offices and operations currently in London. Paris is said to be making quite a pitch, thus reminding many companies how every peace treaty and major agreement has been signed there for a reason: it’s Paris. You want to be there.