FX Rate News

The Canadian dollar strengthened against its U.S. counterpart on Wednesday but gave up much of its advance as rising Russia-Ukraine tensions weighed on investor sentiment.

The loonie was up 0.2% at 1.2740 to the greenback, or 78.49 U.S. cents, after earlier touching its strongest level since last Friday at 1.2683.

“Recent trading has made it clear that the broader risk mood is the essential driver for the CAD at the moment,” strategists at Scotiabank, including Shaun Osborne, said in a note.

U.S. stocks were sharply lower and the safe-haven U.S. dollar gained ground against a basket of major currencies as Ukraine declared a state of emergency and the West unveiled more sanctions against Russia over its move into eastern Ukraine.

Sanctions were not yet expected to disrupt oil supplies, helping to cap the price of oil, one of Canada’s major exports, after it notched a seven-year high on Tuesday. U.S. crude prices settled 0.2% lower at $92.10 a barrel.

Other commodity-linked currencies also gained ground, including a 5-week high for the New Zealand dollar as the country’s central bank hiked interest rates as expected and signaled a more aggressive path forward than even the most hawkish investor had wagered.

The Bank of Canada is expected to hike next Wednesday for the first time since October 2018.

Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year rose 5.1 basis points to 1.977%, approaching last Wednesday’s three-year high at 1.995%.

Currency markets paused for breath on Wednesday after a choppy few sessions as whipsawed markets looked to get a handle on the latest developments in eastern Europe amid a deepening crisis in Ukraine.

Away from the threat of a full-scale Russian invasion of Ukraine, the New Zealand dollar jumped 0.52% after the Reserve Bank of New Zealand raised interest rates, and said more tightening could be necessary.

The euro was holding steady at $1.1325, sterling was pinned at $1.3593, and the safe haven yen and Swiss franc also took a breather having dropped sharply as investors held out hopes a major war over Ukraine could be averted.

Western nations and Japan on Tuesday punished Russia with new sanctions for ordering troops into separatist regions of eastern Ukraine and threatened to go further if Moscow launched an all-out invasion of its neighbor.

One U.S. dollar was worth 115.03 yen in Asia trade, with the greenback having climbed steadily overnight from its near three-week low of 114.48 hit Monday, and 0.9204 francs, after a 0.63% overnight rally.

This left the dollar index which measures the greenback against six peers little changed at 96.063.

“Despite the sanctions on Russia, the FX reaction has been quite muted,” said Carol Kong, a strategist at Commonwealth Bank of Australia.

She said the subdued market reaction and the falls by the dollar and yen overnight, “indicates that market participants are not really concerned about Russia-Ukraine tensions and certainly are not expecting them to spill over to affect the global economic outlook.”

High prices for energy, partly a result of the situation in Ukraine, and other commodities helped the Australian dollar rise to $0.7241 on Wednesday, its highest in nearly two weeks.

Oil rose to nearly $100 a barrel on Tuesday on worries of the Ukraine crisis could cause supply disruptions, and reached its highest level since 2014.

These higher prices were also having an effect in Europe and the dollar tumbled 1.3% on the Norwegian krone on Tuesday.

On the global monetary front, the Reserve Bank of New Zealand gave investors a reminder that central bank policy was still a major factor in currencies.

While its 25-basis-point hike, its third in a row, was widely expected, the central bank revealed it came close to moving by 50 basis points to head off a further pick up in inflation expectations.

It also sharply revised up the projected path for the official cash rate (OCR) to peak at 3.35%, from 2.6% previously and well above market expectations.

Currency markets started the week nervously eying tensions in eastern Europe, with the safe-haven yen not far from a two-week high while the euro was on edge given the energy security and economic implications for Europe of a war in Ukraine.

“Russia-Ukraine tensions are starting to dominate risk sentiment and price action. The market is likely to keep chasing headlines without any clarity on the eventual outcome,” said analysts at Barclays in a note.

Illustrating this, the euro took a small lift early in the Asian session after the office of French President Emmanuel Macron said U.S. President Joe Biden and Russian President Vladimir Putin have agreed in principle to hold a summit on the Ukraine crisis, though it added such a meeting would be impossible if Russia invaded Ukraine.

In turn, the yen lost a modicum of ground on the dollar following the announcement, which comes after a week of heightened tensions spurred by Russia’s military build-up on Ukraine’s borders.

The euro was 0.12% higher at $1.13340 while the yen was at 115.05 per dollar, pausing its earlier drift towards its two-week low of 114.78 touched Friday.

Safe havens like the yen and Swiss franc have been the major beneficiaries of the geopolitical tension in eastern Europe.

Earlier in the session the euro had been hurt and the yen boosted by Sunday’s announcement from the Belarusian defense ministry that Russia would extend military drills in Belarus.

In broad terms, moves in currencies aligned with moves in risk sentiment across asset classes. U.S. share futures slipped in early trading on Monday, before turning positive after news of the possible summit.

When not thinking about the situation in eastern Europe, currency markets are also still concentrating on central bank policy, with divergences in the speed and size of different markets’ interest rate hikes a major factor.

As a result, markets will be closely watching a string of public remarks from U.S. Federal Reserve policy makers this week for any hint that a large 50 basis point rate hike could come at the Fed’s March meeting instead of the more widely expected 25 basis point increase.

The pound was drifting somewhat at $1.36000 in the middle of its recent range, given some support by expectations of another rate hike at the Bank of England’s March meeting, though perhaps weighed by Ukraine tensions.

Public remarks are also due from several BOE policy makers as well.

Bitcoin recovered a little from a mild bruising over the weekend. The world’s largest cryptocurrency was up 2% at around $39,000.

Early on Monday it touched a new two-week low of $38,210.

The safe-haven yen gained more ground on the dollar on Friday as U.S. President Joe Biden said Moscow is preparing a pretext to justify a possible attack on Ukraine, also supporting the Swiss franc and hurting bitcoin.

The dollar slipped to a new two-week low of 114.78 yen in early Asia trade, and is down 0.5% so far this week.

“The support level of 114.63 looks within reach today if more negative headlines on Ukraine emerge,” said CBA analysts in a morning client note, adding that markets were also focused on the Bank of Japan’s policy, as the central bank continues with its policy of yield curve control.

Early morning exchanges of fire on Thursday between Kyiv’s forces and pro-Russian separatists — who have been at war for years and where a ceasefire is periodically violated — have renewed Western fears of an imminent Russian invasion.

U.S. President Joe Biden said Moscow is preparing a pretext to justify a possible attack and the Kremlin expelled an American diplomat.

These tensions also caused the dollar to lose ground on the Swiss franc, with the greenback last at 0.9196 francs, just above Thursday’s two week intraday day low of 0.9186 francs.

At the other end of the risk spectrum, bitcoin was trading around $40,500, around a two-week low, after a tumble late on Thursday left it down 7.6% on the day.

“Crypto has shown us once again that it is a high beta risk asset, and it has a dark sinister look that could morph into something ugly,” said Chris Weston, head of research at Melbourne based brokerage Pepperstone in a morning email.

The euro continued its week of choppy trading based on Ukraine headlines and was at $1.1360, while the pound was at 1.3609 supported by markets betting on more monetary tightening from the Bank of England.

Central bank policy was also a factor in the yen, after the BOJ this week offered to buy an unlimited amount of benchmark 10 year government bonds to underscore its resolve to contain domestic borrowing costs.

Markets have not aggressively tested the BOJ’s 0.25% yield target on those bonds, but yields on other tenors have been rising.

Meanwhile, in the United States, policy makers have continued to publicly debate how aggressively the Federal Reserve should raise interest rates, and whether it should begin with a 25 or 50 basis point hike at its March meeting.

Cleveland Fed President Loretta Mester said late on Thursday the Fed would need to raise interest rates at a faster pace and shrink its balance sheet more quickly than it did after the “great recession”.

The U.S. dollar edged slightly lower on Wednesday as investors became less worried about the risk of Russia invading Ukraine and waited for the release of minutes from the U.S. Federal Reserve’s January meeting.

Equity markets rallied on Tuesday after Russia said it would withdraw some troops from Ukraine’s border. This risk-on tone continued through the Asian session on Wednesday, even though U.S. President Joe Biden warned that more than 150,000 Russian troops were still in a “threatening position”.

Ukraine said the online networks of its defense ministry and two banks were hit by a cyber attack.

In currency markets, the moves were small. The U.S. dollar index edged lower and was down 0.2% on the day at 95.846 by 0831 GMT.

“More optimism around a diplomatic solution in Ukraine may keep applying some pressure on the dollar and the other low-yielders today,” wrote ING FX strategists in a note to clients.

“Given the magnified impact on crude, CAD and NOK should keep struggling to fully cash in on improved geopolitical sentiment,” they added, referring to the Canadian dollar and Norwegian crown.

Long-standing expectations that the U.S. Federal Reserve will raise rates provided a reason for the dollar’s losses to be limited.

Markets are pricing in a 59.5% chance of a 50 basis points hike at the Fed’s next meeting on March 16 and a 40.5% chance of a 25 bps hike.

The minutes from the Fed’s January meeting will be released later in the session.

“We would guess the minutes turn out to be ‘dovish’ – not because they are actually dovish but because it would be hard to out-hawk market expectations at the moment, and we seem primed for a further feel-good risk rally, but will wait to see,′ wrote Elsa Lignos, global head of FX strategy at RBC Capital Markets, in a client note.

As oil prices recovered, the Canadian dollar strengthened slightly against the U.S. dollar but the Norwegian crown was a touch lower on the day.

The Australian dollar, which is seen as a proxy for risk appetite, was up 0.3% at $0.7173 while the New Zealand dollar was also slightly higher on the day.

The safe-haven yen was a touch lower versus the dollar, at 115.770.

The British pound was up 0.1% against the dollar at $1.35565 but steady versus the euro, after data showing UK inflation hit a nearly 30-year high of 5.5%.

The Bank of England has already raised interest rates twice since December and financial markets expect a further rate rise on March 17 after the BoE’s next meeting.

The euro edged higher, up 0.2% on the day at $1.13825.

In cryptocurrencies, bitcoin was little changed, down 0.7% at $44,276.

The dollar was firm in Asia on Friday after hotter-than-expected U.S. inflation and hawkish comments from a Federal Reserve official unleashed a wave of bets on aggressive rate hikes, though similar pressures worldwide kept a lid on gains.

Thursday data showed U.S. consumer prices up 7.5% year-on-year in January, a fourth straight month above 6% and slightly higher than economists’ forecasts for a 7.3% rise.

After that, St. Louis Fed President James Bullard told Bloomberg he’d like to see 100 basis points of hikes by July.

Treasury yields leapt and the dollar jumped to a five-week high of 116.34 yen during volatile overnight trade.

The greenback oscillated against other currencies before turning broadly firmer early in the Asia session. The euro was last down 0.2% at $1.1400 and the Australian and New Zealand dollars each dropped about 0.3% in morning trade.

Rates futures have shifted to price a better-than-even chance of a 50 bp hike next month and more than 160 bps of tightening by the end of the year.

“There is definitely a feeling of urgency at least for some (Fed) members,” said Commonwealth Bank of Australia strategist Kim Mundy in Sydney.

“But the Fed isn’t the only central bank facing this inflation conundrum,” she said, and a hawkish pivot at the European Central Bank last week in particular can cap dollar gains by removing a headwind for the euro.

Bond markets are braced for more hawkishness when the ECB updates its economic projections next month and swaps pricing indicates a nearly 30% chance the Bank of England raises rates by 50 bps next month.

Hike expectations held sterling fairly steady and it was last at $1.3541.

Even the hitherto dovish Reserve Bank of Australia Governor Philip Lowe on Friday said if the economy tracks forecasts, hikes could be on the agenda this year.

The Aussie dollar, at $0.7145, is on track for a weekly rise of nearly 1% despite the dollar’s Friday strength.

The New Zealand dollar, last at $0.6658 is also heading for a second consecutive weekly gain.

It is the outliers that have been punished, with the Swedish crown dunked 2% after the central bank stressed that surging inflation is temporary overnight and kept policy steady.

The Bank of Japan also affirmed its resolve to anchor borrowing costs and yields on Thursday, promising to buy an unlimited amount of 10-year bonds at 0.25% after several days of selling pressure in Japan’s bond market.

The yen fell to a more-than-three-month low on the euro overnight. The U.S. dollar index was a tad stronger at 95.846 on Friday, just below its 50-day moving average.

The euro edged up on Wednesday but was off Friday’s three-week high, as traders looked for clues as to when the European Central Bank will hike interest rates.

The dollar was little changed, a day before the release of U.S. consumer price data that may offer new indications about the pace of the Federal Reserve’s monetary tightening.

Investors have been revising their forecasts for ECB rate hikes after the bank caught them off guard last week, with President Christine Lagarde flagging for the first time that monetary tightening was a possibility.

Seeking to temper investors’ growing expectations for aggressive action, Lagarde then said on Monday there was no need for extensive tightening.

However, Bundesbank President Joachim Nagel said in an interview to German newspaper Die Zeit on Wednesday that the ECB could raise interest rates this year as inflation was proving to be high for longer than expected.

“We are revising our ECB key rate forecast to reflect last week’s hawkish shift by ECB President Christine Lagarde,” said UniCredit’s Marco Valli, Global Head of Research and Luca Cazzulani, Co-Head of Strategy Research.

They now expect a 25 basis point rate hike in the last quarter of the year and one early in 2023, compared to none previously. That could give limited support to the euro, they said, as policy-rate bets remained in favour of the U.S. dollar.

Money markets are pricing in a 10 bps ECB rate hike in June and a 50 bps rate hike by December.

Markets are also pricing in a 75% chance of a 25 or 50 bps Fed hike in March, according to CME’s FedWatch Tool.

Economists polled by Reuters predicted that U.S. inflation data due on Thursday would show that consumer prices had climbed 7.3% year-on-year in January.

“We expect the (U.S. inflation) data to support expectations of the Fed being hawkish,” said Jens Nærvig Pedersen, FX and rates Strategy chief analyst at Danske Bank.

The euro edged up 0.2% to $1.1437 at 1210 GMT, after touching $1.1483 on Friday, its highest level since Jan. 14.

The dollar index, which gauges the greenback against six major peers including the euro, was down 0.16% at 95.435, after bouncing off a 2-1/2-week low of 95.136 reached Friday.

A resurgent euro was hunkered just short of strong resistance levels on Tuesday as traders awaited U.S. inflation data due later in the week, wary it could trigger gains in the dollar.

The common currency leapt 2.7% last week after a hawkish shift in tone at the European Central Bank. It has held gains but has been unable to beat resistance around $1.1483 even as European bond yields have leapt and last bought $1.1441.

Stunningly strong U.S. labor data last week has put extra focus on inflation — forecast at a four-decade high 7.3% — in the lead up to March’s Federal Reserve meeting.

Futures markets are pricing an almost 1-in-3 chance of a 50 basis point rate rise and the prospect of aggressive hikes has been supporting the dollar.

“The surprise beat by the non-farm payroll numbers (which we were warned by Fed officials and the White House would be very weak due to omicron) leaves the Fed in an unexpected territory,” said NatWest Markets rates strategist Jan Nevruzi.

“The CPI will be critical on how the narrative develops until the March (meeting),” he said, though adding that barring a big surprise, March will probably bring only a 25 basis points hike.

The dollar crept 0.1% higher on the yen in early Asia trade to 115.22 and the U.S. dollar index hovered at 95.425.

Overnight bitcoin and the Australian dollar posted gains as equity markets cautiously rallied in Europe. The Aussie rose about 0.7% and was last at $0.7130, just shy of resistance around its 50-day moving average of $0.7163.

Bitcoin punched through its 50-day average to top $44,000 for the first time in nearly a month on Monday and is up more than 17% in four sessions.

The New Zealand dollar held a small overnight gain at $0.6642. Sterling was steady at $1.3538.

A quiet data calendar awaits on Tuesday, with a U.S. small business survey due later in the day. U.S. inflation data is due on Thursday.

The dollar was carrying a couple of bruises on Wednesday as Federal Reserve officials played down the chance of a half point rate hike in March and a rally in global equity markets tarnished some of its safe haven allure.

Stellar results from Alphabet after the bell saw that stock surge 7% and lift Wall Street futures, benefiting risk sensitive currencies including the Australian and New Zealand dollars.

The euro looked steadier at $1.1270, having risen 0.3% overnight and further away from last week’s 20-month trough at $1.1122. A break above $1.2300 resistance would help counter the recent bearish trend.

The dollar was back at 114.70 yen, after dropping 0.4% overnight and away from last week’s top at 115.68 which now marks major resistance. Still, it remains comfortably above key support around 113.47.

Reflecting that pullback, the dollar index eased to 96.272 and off its recent 19-month high of 97.441.

The euro got a lift from rising EU yields, with German 10-year yields hitting their highest since mid-2019 after lofty inflation readings stoked speculation the European Central Bank might have to tighten early.

“A surprisingly high inflation print in Germany has driven another leg up in euro-zone rate expectations, and while we don’t expect a major shift at the ECB policy meeting on Thursday, the direction of travel appears clear,” said Jonas Goltermann, a senior market economist at Capital Economics.

Likewise, British 10-year yields reached levels last seen in early 2019 ahead of an expected rate hike from the Bank of England this week.

That saw the pound push up at $1.3522 after three sessions of gains.

All this means the Fed is not the only hawkish central bank in town, restraining the dollar. Indeed, Fed officials have been pushing back against market talk they might hike by 50 basis points in March.

St. Louis Fed President James Bullard, a noted hawk, on Tuesday said he would argue for rate rises in March, May and June, but did not favour a half-point move.

Capital Economics’ Goltermann argued the market was still underestimating how high U.S. rate would have to go to rein in inflation.

Fed fund futures imply a peak around 1.75-2.0% which would be very low by historical standards and would likely still leave real rates in negative territory
“We think the terminal rate in the U.S. currently discounted in money markets is too low, both in absolute terms and relative to equivalent rates elsewhere,” he added.

“This is the key reason why we think the greenback will eventually resume its rise.”

The Australian dollar slumped on Tuesday after the Reserve Bank of Australia vowed to remain patient about raising interest rates, even in the face of the hottest inflation since 2014.

The U.S. dollar nursed its wounds following its biggest drop in nearly three weeks against major peers overnight, as Federal Reserve policymakers allayed investor fears of a very rapid tightening of monetary policy.

The Australian dollar sank as much as 0.52% and was last down 0.47% at $0.7036, retracing nearly half of Monday’s 1.06% rally, which was its biggest since early June.

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Expectations had been building for RBA Governor Philip Lowe to capitulate on his long-held contention that a rate hike in 2022 was unlikely, with inflation printing hot and the labor market strengthening.

But while the central bank announced an end to its bond-buying stimulus, as widely expected, it said that was not a signal for near-term rate increases, and it was prepared to be patient while monitoring price pressures.

“We thought the RBA would be dovish, and that’s what they’ve delivered,” said Commonwealth Bank of Australia strategist Joseph Capurso.

“The RBA is saying it’s different from the Fed,” which aims to end its quantitative easing program in March, when it is also expected to start raising rates.

Meanwhile, the U.S. dollar index which measures the greenback against six rivals, not including the Aussie – was almost unchanged at 96.667 following a 0.59% tumble in the previous session.

The index hit an almost 19-month high of 97.441 at the end of last week, as investors pondered chances the Fed could raise rates by 50 basis points at its March meeting.

Overnight though, a chorus of Fed officials backed a lift-off in rates next month, but spoke cautiously about what might follow.

The U.S. Treasury’s top economist also commented on Monday that inflationary pressures should ease this year due to weaker demand for goods, easing supply bottlenecks and a receding coronavirus pandemic.

“Recent Fed remarks appeared to push back on the odds of a 50bp rate hike in March,” putting the focus on economic data this week for clues on the pace of policy tightening, including the closely watched monthly payrolls report on Friday, TD Securities strategists wrote in a note.

U.S. payrolls are forecast to show a gain of 153,000 jobs for January, down from 199,000 in December, with the unemployment rate holding steady at 3.9%, according to a Reuters poll.

Money markets have priced in a quarter-point rise for March, and four more by year-end.

The Bank of England holds its policy meeting on Thursday, with a Reuters poll predicting a second rate hike in less than two months after UK inflation jumped to its highest in nearly 30 years.

The European Central Bank also meets on Thursday. While no policy change is expected, analysts said the Fed’s looming rate hikes will narrow the ECB’s window for action.

The euro was largely unchanged at $1.1232, following a 0.80% jump on Monday.

Sterling was also little changed at $1.34395 after gaining 0.33% in the previous session.

The greenback slipped 0.15% to 114.97 yen as it continued to ease back after reaching a nearly three-week high at 115.68 on Friday.

Trading in Asian hours may be thin and moves more volatile, with several markets on holiday for the Lunar New Year.