Stefano Rebaudo
(Reuters) – The dollar strengthened ahead of Wednesday’s release of key U.S. macroeconomic data, with investors also waiting for a monetary policy meeting in Canada that could trigger a cycle of interest rate cuts.
Investors are awaiting Wednesday’s data from the US services sector, and further employment data later in the week.
The dollar hit its lowest level in almost two months as signs of an easing U.S. economy on Monday strengthened the case for earlier Federal Reserve interest rate cuts.
The Bank of Canada meets the day before the European Central Bank meets on Thursday.
Canada’s annual inflation rate fell to a three-year low of 2.7% in April, causing money markets to see an increased chance of an interest rate cut this month.
Markets price the probability of a Canadian interest rate cut on Wednesday at around 80% and are discounting 65 basis points (bps) of monetary easing by the end of the year.
“We believe the Bank of Canada is overdue and the dovish turn will resonate among smaller G10 countries such as New Zealand,” said Themos Fiotakis, global head of forex strategy at Barclays.
The Canadian dollar was in the middle of a multi-month range at C$1.3683 per dollar.
It increased by 0.19% to 104.36. On Tuesday, it reached 103.99, the lowest level since April 9.
“The bottom line is that markets are pricing in the Fed to cut rates almost as much as the ECB,” said Barclays’ Fiotakis.
“The discrepancies in the foundations are not valued. However, the dynamics of growth and inflation will make the Fed much less dovish than other central banks,” he added, arguing that he saw an opportunity for investors to take long positions in dollars.
Markets also closely watched futures contracts, which hovered near four-month lows on Wednesday.
“If low oil prices make disinflation a global phenomenon again, we wouldn’t expect more policy divergence or a weaker dollar as that would trigger dovish sentiment everywhere,” said Thierry Wizman, global forex strategist at Macquarie.
The euro fell 0.1% to 1.086 against the dollar.
Analysts see the ECB’s 25 basis point rate cut as a given this week, but are unsure about the rate outlook.
The yen fell about 0.8% to 155.90 per dollar, outweighing Tuesday’s gains that were fueled by investors withdrawing bets on emerging markets.
Real wages in Japan fell for the 25th consecutive month in April as inflation outpaced nominal wage increases.
On Tuesday, Bank of Japan Deputy Governor Ryozo Himino said the central bank must remain “very vigilant” about the impact a weakening currency could have on the economy and inflation.
Investors see a tightening of BOJ policy in the future, although not enough to strengthen the yen.
Australian and New Zealand dollars were broadly unchanged after reports from the domestic economy turned out to be less dire than investors feared.
After several turbulent days, emerging markets have stabilized.
The Mexican peso has stabilized after falling about 4% against the dollar and almost 6% against the yen since the re-election of the ruling leftist Morena party, which in coalition brought it within reach of a two-thirds majority in both houses of Congress.
Some analysts say expectations for greater government control over the economy have weighed on Mexico’s currency.
“President-elect Sheinbaum has signaled responsible fiscal policy and central bank autonomy,” Macquarie’s Wizman said, arguing that the Mexican asset sell-off appears overblown.
“The price may subside soon, leading to a period of outperformance for the Mexican peso,” he added.
The Indian rupee recovered from a seven-week low as election results showed voters returned Narendra Modi to power by a much smaller margin than expected.
