Daily Currency Update

USD - US Dollar

Short-term rates and the dollar continue to diverge following Friday’s US jobs report. The 2-year USD swap rate is now at 4.67%, its highest since November, yet the dollar struggles to capitalize. Two key factors are at play: firstly, risk sentiment, notably equity performance, remains resilient despite hawkish Fed rate expectations. The assumption that higher USD rates would dampen risk sentiment and boost safe-haven flows into the dollar hasn't materialized. Secondly, G10 rate expectations overly rely on Fed pricing. Despite differing domestic conditions, such as Canada's lower inflation and job losses in March, rate cut expectations parallel the Fed's timeline. Even with divergent stories, the Bank of Canada-Fed pricing gap by year-end is only -10bp. Similarly, ECB easing expectations have diminished despite lower eurozone inflation data. The case for a near-term dollar rise is clear, but a significant rally may await clearer divergence between the Fed and other developed central banks. Dovish signals from the Bank of Canada and ECB this week might prompt a return to the greenback. The US CPI release is a major risk event, but if consensus holds with core MoM inflation at 0.3%, expectations for a dovish Fed repricing should diminish. Today, focus lies on the NFIB small business optimism index.

CAD - Canadian Dollar

The CAD remains relatively unchanged for the session. While US inflation data take the spotlight for markets this week, the CAD also faces the Bank of Canada's policy decision tomorrow. Despite disappointing headline jobs data last Friday, the presence of elevated wages suggests that policymakers are likely to maintain their sixth consecutive hold, accompanied by a cautious outlook on policy. With Q1 growth momentum showing strength, surpassing expectations, and pending government budget announcements, policymakers may not yet entertain the notion of rate cuts. A cautious stance could offer slight support to the CAD, but its current position near the estimated fair value (1.3605) indicates limited potential for CAD gains unless US rates decline. Observe USD/CAD trends.