Published September 12, 2016
- The US dollar is building on its gains from Friday, as global financial markets sell off amid fears that monetary policy from the world's largest central banks is about to tighten
- USDCAD is trading in the low 1.3100's as US treasury yields rise and oil prices decline with WTI 2% lower to $44.80/bbl
- Speeches this morning from Fed officials Lockhart, Kashkari and Brainard will be scrutinized for information on the Fed's upcoming September meeting
- Brainard's speech will garner the most attention as she is the sole voting member of the three and has historically voiced a dovish tone
- Her speech today comes the day before the media blackout period begins ahead of the Fed's September 21st meeting and this has caused concern that she will be guiding the market towards the view that a hike is on the table
- If she does endorse the recent hawkish tone of her colleagues, then the market would be forced to drastically reprice the probability of a September hike that is currently standing at only 23% (Chart 2)
- This would likely lead to further USD strength and a continuing sell off in risk assets
- Of course, each time this narrative has played out before the market has correctly called the Fed's bluff – can they pull it off once more?
- The uncertainty surrounding these events has caused a spike in volatility across financial markets with the VIX (a measure of S&P 500 equity volatility) rising over 64% since Thursday – the summer doldrums appear to be over (Chart 3)
- USDCAD option volatility has picked up as well, as the price of protecting against future USDCAD movement increases, although options volatility and thus prices for the pair are still cheap compared with their 2016 highs
- The economic calendar for Canada is light this week and thus it will be a US dollar driven story for USDCAD traders with US Retail Sales, Industrial Output, CPI and Consumer Sentiment all on tap
- Oil prices are lower by over 2% to start the week and this may be influenced by the broad risk sell off, however it is also important to note that US rig counts rose again on Friday for a tenth straight week pointing to the possibility of higher US production in the coming months which could weigh on prices
Charts: (1) USDCAD forms a base near 1.2825. (2) Fed interest rate hike probability. (3) Volatility spikes higher. (4) Economic Calendar.