– Fed Chair warns interest rates could still go higher.
– US 10 Treasury yields jump.
– US dollar opens with a bid after surging yesterday.
USDCAD: open 1.3807-11, overnight range 1.3791-1.3821, close 1.3806, WTI $76.42, Gold, $1954.01.
The Canadian dollar attempted a rally on Thursday, but it failed miserably following Federal Reserve Chair Jerome Powell’s somewhat hawkish interest rate outlook. Mr. Powell was speaking at an International Monetary Fund conference in Washington.
His words did not provide comfort to those seeking confirmation that not only had US interest rates peaked, but they would soon be reduced. On the contrary, he stated that inflation remains well above the 2.0% target, and the job market is still tight. He added that if strong growth keeps inflation at elevated levels, a monetary policy response will be necessary. Adding to the concerns of those hoping for a rate cut, Mr. Powell mentioned that the Federal Open Market Committee isn’t sure if the current monetary policy is restrictive enough to lower inflation.
The US dollar surged on this news, Wall Street stocks dropped, and the US 10-year Treasury yield leaped 15.5 basis points to 4.64%.
In Vancouver, Bank of Canada Senior Deputy Governor did not elicit the same response with her speech, despite stating that the era of low interest rates is over. Her rationale included pointing out that the peak savings era of the baby boomer generation is waning, implying a potential rise in interest rates as the downward pressure from their savings diminishes. Additionally, she suggested that global economic integration, once a force for lower rates due to the high savings of developing nations like China, is now reversing its course, setting the stage for increased rates.
She then warned about the risk of higher rates due to tensions in regions like Ukraine and Israel/Gaza, which threaten to escalate global energy costs and disrupt supply chains, putting upward pressure on inflation.
Overnight markets reacted to Mr. Powell’s interest rate view with Asian and European equity indexes dropping, while the US dollar consolidated gains.
EURUSD drifted in a 1.0656-1.0689 band, with traders awaiting ECB President Christine Lagarde’s speech today. She is expected to echo Mr. Powell’s stance and argue that Eurozone rates will remain at elevated levels for an extended period.
GBPUSD traded in a 1.2205-1.2238 range, gaining some support after the UK avoided a recession. Q3 GDP growth was flat (0.0% q/q) rather than negative (forecast -0.1% q/q). However, the British economy is expected to experience minimal growth in 2024.
USDJPY was firm in a 151.22-151.49 range, supported by the jump in US Treasury yields and recent dovish comments by Bank of Japan Governor Ueda.
AUDUSD wallowed in a tight 0.6352-0.6373 range due to broad US dollar strength and the risk of higher US rates.
Today’s US data includes the preliminary Michigan Consumer Sentiment Index for November