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On January 29th, the US Treasury yield curve steepened for the second consecutive trading day, primarily driven by a weaker dollar and stronger oil prices, both of which boosted inflation expectations. The 2-year/10-year Treasury yield spread widened to 67.6 basis points at one point, up from 66.6 basis points at the close on Tuesday. The yield curve exhibited a typical "bear market steepening" characteristic, where longer-term yields rise faster than shorter-term yields as investors price in the risk of renewed inflation acceleration. Gunnett Dingela, Head of US Interest Rates Strategy at BNP Paribas, stated, "Weaker dollars typically lead to longer-term yields becoming more sensitive to inflation risks. Therefore, the dollar and Treasuries often act as pressure relief valves for the combination of monetary and fiscal policies. If the combination of fiscal and monetary policies suggests that the dollar will continue to weaken, then I think the rise in long-term yields is a textbook reaction."The German DAX 30 index closed down 91.30 points, or 0.37%, at 24,816.93 on Wednesday, January 28; the UK FTSE 100 index closed down 55.50 points, or 0.54%, at 10,152.30 on Wednesday, January 28; and the French CAC 40 index closed down 86.14 points, or 1.06%, at 8,066.68 on Wednesday, January 28; European The Stoxx 50 index closed down 62.53 points, or 1.04%, at 5932.06 on Wednesday, January 28; the Spanish IBEX 35 index closed down 206.52 points, or 1.16%, at 17597.58 on Wednesday, January 28; and the Italian FTSE MIB index closed down 343.94 points, or 0.76%, at 45096.50 on Wednesday, January 28.The percentage of winning bids for the 4-month U.S. Treasury bonds auctioned as of January 28 was 45.62%, compared to 50.47% previously.The bid-to-cover ratio for the US 4-month Treasury bond auction ending January 28 was 2.92, compared to 2.99 previously.The US 4-month Treasury auction on January 28th yielded a winning bid of 3.59%, compared to 3.58% previously.

USD/CAD declines to 1.3500 on firmer Oil prices, BoC concerns over US inflation, and Fed Minutes

Daniel Rogers

Apr 10, 2023 14:35

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The USD/CAD maintains losses close to 1.3500, shattering a four-day winning trend, as traders brace for key Easter Monday data/events on major bourses. However, the recent decline in the Loonie-U.S. dollar exchange rate may be due to the increase in the price of WTI petroleum oil, Canada's primary export. In contrast to the recent increase in ardent Fed forecasts, the Bank of Canada's (BoC) dovish bias poses a challenge to pair sellers.

 

After increasing for three consecutive weeks, WTI crude oil prices gain 0.61 percent intraday near $80.00. Recent increases in the price of black gold may be due to geopolitical concerns surrounding China and Taiwan. In addition to the supply cut by OPEC+ and the faltering US dollar, the energy benchmark is sustained by the supply cut by OPEC+ and the weakening US dollar.

 

However, the US Dollar Index (DXY) has fallen for three consecutive weeks and is under pressure near 102,000.

 

Fears of higher Fed rates versus inaction from the Bank of Canada (BoC) grew after the upbeat US Jobs report versus the lack of significant positives in the March Canadian jobs report.

 

As a result, the CME's FedWatch Tool indicates a 69% chance of a 0.25 basis point rate hike in May, up from 55% prior to the US employment report.

 

Canada's headline Net Change in Employment increased to 34.7K in March from 21.8K in February, compared to the market consensus of 12K, while the Unemployment Rate came in at 5% versus the analysts' estimate of 5.0%. During the specified month, the Participation Rate decreased to 65.6% from the expected and previous rate of 65.7%. In addition, the average hourly wage fell 5.2% year-over-year in March, down from 5.5% in February.

 

In contrast, the US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls (NFP) increased by 236K in March, the lowest increase since January 2021 (considering revisions), compared to the expected 240K and the previous 330,000. Additionally, the unemployment rate fell from 3.6% to 3.5%, while the labor force participation rate rose from 62.6% to 62.6%. The annual wage inflation rate decreased from 4.6% to 4.2%, below market expectations of 4.3%.

 

Futures on US equities ended higher, but yields remain under pressure ahead of the crucial BoC monetary policy meeting, US inflation, and Fed Minutes. Given the dovish concerns from the Bank of Canada (BoC) and the likely hawkish comments in the FOMC Minutes, the USD/CAD may see additional gains, barring any unexpected developments.


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