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US Yields Propel USDCAD to 9-Month High

Published November 14, 2016
  • USDCAD continues its march higher as spot closes in on 1.3600 to start the week
  • The US yield curve is driving a resurgent US dollar right now as markets adjust to higher inflation expectations in the US under a Trump administration that is likely to embark on a debt and tax cutting binge once in office
  • Trump's tentative plans for a US$1 Trillion infrastructure program would be a boon for construction jobs with spillover effects into other industries as well 
  • Proposals for tax cuts, both personal and corporate, are also contributing to the relative economic optimism ahead of Trump's first term
  • The yield on the US 10-year treasury has climbed from a post election night low of 1.716% to a high this morning of 2.28%, the highest since December 2015 and a 32% move in only three days 
  • This move in rates has driven up the trade weighted value of the US dollar by over 2.7% in the same time frame 
  • Markets are now pricing in a greater than 75% chance of a Fed hike next month, with almost two full hikes being implied by the end of next year compared to only one a few weeks ago
  • The Loonie is under pressure as a result with not much in the way of USDCAD bulls until at least 1.38 in the short term
  • The long term isn't looking much better and while we acknowledge that forecasting exactly what a Trump presidency is going to look like is next to impossible, we are also cognizant that, at present, the bond market is positioned for higher inflation, higher policy rates, and higher US growth, and the bond market is usually correct
  • Canada would generally benefit from such an outcome… however, Trump is riding a wave of nationalist fervour into the White House and he may be induced to challenge current trade deals such as NAFTA
  • All in all, we are entering a fundamental shift for capital markets with volatility expected to remain high
  • For USDCAD, risks remain biased to the topside with technical and fundamental indicators alike flashing warning signs for the Loonie

Charts: (1) USDCAD bias to the topside. (2) US 10-yr yields spike higher. (3) Economic Calendar.