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USD index at three week high as U.S. rate hikes come back into rogue

Published May 18, 2016
  • The USD index is trading at a three week high this morning as the greenback posts solid gains against the majors
  • Yields on the two year U.S treasury bond are at their highest since late April as the market finally starts to re-price the risk of a Fed rate hike in the coming months
  • Yesterday’s U.S economic data was stellar with top tier readings on inflation, housing starts and industrial production all beating expectations
  • When coupled with last week’s strong retail sales data – the best since February 2015 – we are starting to see an acceleration in the U.S economy’s growth profile that will be difficult for the Fed to ignore
  • Over the past few days Fed speakers have sounded more positive on the prospects of rate hikes in the second half of the year
  • Dallas Fed President Robert Kaplan was the latest, saying yesterday that he would advocate for a rate hike either in June or July
  • The market has essentially been pricing in zero risk of a hike this year and thus may be significantly behind the curve leading up to the June and July Fed meetings, leaving lots of upside room for the USD and U.S rates
  • Yield spreads between the U.S and Canadian two year government bonds are at their highest since March and imply a stronger USD relative to CAD
  • There are no local economic data from the US or Canada today however the EIA’s oil inventory report comes out at 1030am EDT and the minutes from the April Fed meeting come out at  2pm EDT

USDCAD Technical Glance
USDCAD remains in its up trend above the rising 21 day moving average at 1.2770.  Yield spreads (white) are working in favour of the USD and may have more upside than downside in the near term.