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USD on a tear following FOMC minutes

Published May 19, 2016
  • There is a distinct ‘risk-off’ tone across markets this morning as equities, commodities and growth currencies are all in the red following yesterday’s April FOMC minutes
  • The Fed revealed a more hawkish bias than the market had been anticipating all year…
  • …and thus the chances of a rate hike at the June meeting rose to 33% today from less than 13% earlier in the week
  • It appears that the process of normalizing interest rates as the U.S economy improves is going to be volatile, creating conditions for wild swings in USD valuation
  • At present the USD may be undervalued as the market seems to have been caught wrong footed regarding Fed expectations
  • The USD index rose over 1% against the majors yesterday and U.S two year yields spiked to their highest level since March 2016 at 0.9002 – extending an eight day, 25% move higher as traders dumped bonds (yields rise as prices fall)
  • Oil is also suffering with WTI down 3.8% since the FOMC minutes to$47.33 per barrel despite supply disruptions in Canada and Nigeria
  • The Loonie has been dragged lower along with it as the greenback trades to its best levels against CAD since early April
  • U.S Jobless Claims came in on target at 278K claims for last week, while Canadian Wholesale trade for March fell more than expected printing -1% compared with -0.5% expected

USDCAD Technical Glance
USDCAD has broken out of its recent period of consolidation.  Technical indicators suggest further USD gains as short term moving averages and momentum indicators are in alignment.  The spread between U.S and Canadian two year bond yields also continues to diverge in favour of the USD – balance of risk lies with USD appreciation.