Baystreet.ca - - Risk sentiment improves on tariff story.
- US inflation data in focus.
- US dollar slides across the board
USDCAD: open 1.4382, overnight range 1.4343-1.4388, close 1.4380, WTI $76.77, Gold, $2666.88
The Canadian dollar is consolidating yesterday’s late afternoon rally ahead of key US inflation data.
US Producer prices are expected to have risen 3.4% in December compared to 3.0% y/y and 0.3% m/m (vs December 0.4% m/m). The data is being closely watched for evidence that not only has the American inflation problem not gone away, but it is also starting to rise. If so, the Fed will leave rates unchanged for longer than previously expected.
The Canadian dollar rally was sparked by a Bloomberg story that said Trump’s team plans to suggest a gradual approach to imposing trade tariffs. Rather than one-off 25% hikes for Canada and Mexico and 10% for the rest of the world, they are proposing a monthly 2.5% increase. In their minds, this method improves the American leverage while avoiding an inflation spike.
However, they have not presented incoming President Donald Trump with the proposal, which suggests the graduated tariff scheme may be just wishful thinking. Mr. Trump likes to make a big splash and hiking tariffs by 25 and 10% on Day 1 is a cascade.
EURUSD chopped about in a 1.0233-1.0278 range with price action tied to the broader US dollar trends. There are no significant Eurozone economic data on the horizon this week. Comments from ECB officials appear to be limiting gains. Chief Economist Philip Lane suggested that rates still needed to go lower while Finland’s Central Bank Governor Ollie Rehn supported rate cuts due to a weak economic growth outlook.
GBPUSD rallied to 1.2250 then gave back all the gains and dropped to 1.2165, just above the overnight session low of 1.2155. Sterling climbed amid widespread US dollar weakness, while traders closely monitor Gilt yields, which inched up to 4.883% from 4.84%. Chancellor Rachel Reeves’ parliamentary address on public finances adds to the cautious tone as markets await key UK CPI, PPI, and Retail Price data scheduled for Wednesday.
USDJPY traded erratically in a 157.12-1.5813 band as Japanese markets resumed after a long weekend. Bank of Japan Deputy Governor Ryozo Himino’s remarks suggested a potential rate hike, contingent on economic data aligning with expectations.
AUDUSD briefly benefitted from the tariff-related news and climbed from 0.6167 to 0.6208 but retraced those gains by the NY open. Weak Australian consumer confidence data (-0.7% for January versus -0.2% in December) added to the subdued market sentiment.
There are no Canadian economic reports today.