Powells speech yesterday and the FOMCs official postmeeting commentary suppressed speculations of early QE tapering and rate hikes. The Fed chairman focused on fragile economic recovery and reiterated the transitional nature of rising inflation based on a low base effect.
The US dollar returned to moderate weakness on these statements. EURUSD went back above 1.21, reaching highs since late February. GBPUSD is once again flirting with 1.4000, a major round level.
USDCAD collapsed to 1.2300, the lowest since January 2018. Demand for the Canadian dollar against the US dollar is supported by the apparent contrast in monetary policy in the neighbouring countries. The Bank of Canada has completed its corporate bond purchases in recent weeks and cut government bonds purchases on the balance sheet while the Fed keeps most of its pandemicdriven measures.
Amongst other things, Fed easing is supporting the prices for commodities and energy on the financial markets. Brent is back above 67, and WTI is above 64, close to sixweek highs. Rising oil is further feeding demand for commodity currencies, including the Canadian dollar.
Fed policy softness makes the dollar a funding currency in the markets and causes trade deficits to widen. Fresh data marked new records for the goods deficit in March, reaching 90.6 billion.
The good thing about the growing US deficit is that it is often a companion to the accelerated growth of emerging market economies and markets.