• USD/CAD Slips in Tokyo in Fragile Market Conditions Ahead of Fed.
  • The Fed has the option of a much higher terminal rate compared to the Bank of Canada.

USD/CAD is under pressure in Tokyo as the US Dollar slips deeper below 20-year highs that were set against a basket of currencies on Monday. As of this writing, USD/CAD is trading at 1.2843 and down ~0.25% from 1.2881 high to 1.2841 low to here.

The Federal Reserve is expected to raise rates by 50 basis points to 1.0% on Wednesday. While there are no new forecasts ahead of the June 14-15 FOMC meeting, another 50 basis point hike is also widely expected. In fact, as Brown Brothers Harriman analysts note, the WIRP then suggests nearly a 50% chance of a 75 basis point rise.

“Looking further ahead,” the analysts said, “the swap market is now pricing in a 300 basis point tightening over the next 12 months, which would see the Fed Funds rate peak at nearly 3.5%. Due to the media blackout, there are no Fed speakers until Chairman Jerome Powell’s post-decision press conference on Wednesday afternoon.’

Sentiment pushed the yield on US Treasuries higher, with the 10-year yield trading today above the 3% level, the highest since December 2018. Similarly, the 2-year yield rose is trading near 2.75% today, the highest since April 22 and getting closer. today’s high near 2.78%.

”This uptrend is likely to continue as US inflation soars and the Fed continues its aggressive tightening cycle. Note that the 2-year interest rate differentials are back in favor of the dollar after a brief corrective phase last week. In particular, the spreads with Japan (276 bp) and the UK (112 bp) continue to reach new cycle highs, while the spread with Germany (248 bp) is lagging a bit. All three are expected to continue to rise,” analysts at Brown Brothers Harriman said.

Meanwhile, analysts at TD Securities said they believe USD/CAD is a tricky proposition given that the Fed has the option of a much higher terminal rate against the Bank of Canada. ”We prefer to attenuate a range of 1.24/28 in USD/CAD until proven otherwise.”

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