October 25, 2021
EUR/USD: The euro strengthened as news that China Evergrande Group, a heavily indebted real estate company, avoided default boosted appetite for risky assets. Investors have locked in gains after the dollar index hit a yearly high last week as they build expectations for more rate hikes in other currencies soon. Still, the dollar cut losses on Friday, and Treasury yields fell after Federal Reserve Chairman Jerome Powell said the U.S. central bank should start cutting asset purchases soon, but should not raise interest rates yet. He still expects inflation to return to 2% over time. This led to an initial sell-off in U.S. rates, causing the 10-year UST yield to fall sharply. U.S. stocks also fell.
USD/CAD: The strengthening of the Canadian dollar has slowed in recent days by the last full trading week in October. Nevertheless, that leaves it at its highest average price against the U.S. dollar since June. Commodity prices, especially energy prices, have continued to rise. WTI is at levels last seen in late 2014. The commodity is a key Canadian export commodity that could affect local inflation and therefore monetary policy. Following the inflation data, all eyes are on the Bank of Canada’s rate decision on Wednesday. The Bank of Canada is expected to keep its benchmark interest rate unchanged at 0.25%. However, the pace of local bond purchases is expected to be lowered from CAD 2 billion to CAD 1 billion. The aggressive policy from the Bank of Canada since mid-September may open the door to cautious disappointment this week. Nevertheless, this may not be enough to offset the underlying fundamental forces supporting the Canadian dollar lately.
XAU/USD: The gold price is consolidating at its highest level and buying pressure is not abating amid a corrective decline in the U.S. dollar across the board. Good earnings reports from U.S. corporations came to the rescue of gold bulls as upbeat results drove Wall Street indices to new record highs, which negatively impacted demand for the dollar as a safe haven. However, upside attempts on the gold price seem limited as U.S. Treasury bond yields continue to rise amid aggressive Fed interest rates and rising inflation expectations. Gold traders are now waiting for weekly jobless claims in the U.S. Broader risk sentiment will continue to be the main driver of the market. Gold is generally considered a hedge against inflation and currency volatility, but a hawkish move by major central banks would make gold less attractive.