Currency markets stabilize after hawkish comments from Bank of Canada

By David Henry

NEW YORK (Reuters) – Major currencies stabilized again late on Wednesday after startling statements from the Bank of Canada sparked an outburst of volatility in relatively calm markets.

The moves left the US dollar index down 0.1% at 93.8240 after the dollar weakened against the Canadian dollar, euro and Japanese yen.

The greenback initially lost 0.7% against the Canadian dollar after the Bank of Canada signaled that it may raise interest rates sooner than expected. But the move eased and left the US dollar down 0.4% against the loonie.

Prior to the announcement, seen by some as surprisingly hawkish, the Canadian dollar had weakened to its lowest level in nearly two weeks against its U.S. counterpart.

“You’re going to see more volatility and currency swings here,” said Ed Moya, senior market analyst at brokerage OANDA.

Traders will have different inflation expectations in each region, Moya said, adding, “Interest rate differentials are going to be very difficult to calculate for some currencies.”

The Bank of Canada’s comments could be the first trigger for further assessments of interest rate developments and the impact on currencies as central bankers try to support the pandemic recovery without triggering sustained inflation.

Foreign exchange markets had moved little in the first two days of this week, with traders pausing for monetary policy announcements from the world’s major central banks, including the US Federal Reserve, which meets next week.

For much of the day, the euro traded within 0.2% of its Tuesday close against the dollar. It last rose around 0.1% to $1.1607.

The European Central Bank meets on Thursday and is expected to take a dovish stance.

The German government has cut its 2021 growth forecast for this year as bottlenecks in semiconductor supply and rising energy costs delay the recovery of Europe’s largest economy.

The yield on German 10-year bonds fell to its lowest in more than a week and its yield curve flattened.

Similarly, the US yield curve flattened, with the spread between two- and 10-year Treasury yields narrowing to less than 104 basis points, the least since August. The 10-year yield fell below 1.53%. It had reached 1.70% last week.

The flattening of yield curves in developed markets this week could reflect fears analysts say central banks are wrong if they tighten policy too soon in the face of higher inflation that turns out to be temporary.

The Australian dollar rose 0.3% to $0.752 after data showed Australian core inflation hit a six-year high in September, surprising the market. The data caused short-term yields to surge.

The Reserve Bank of Australia meets on Tuesday next week and market prices are at odds with RBA policymakers’ insistence that there will be no rate hike until 2024.

Against the Japanese yen, the US dollar fell 0.3% to 113.7950 – still within recent ranges and close to the four-year high of 114.695 the dollar hit against the yen a week ago.

The Bank of Japan meets on Thursday and is expected to lower its economic assessment. Markets have been betting on no rate hikes in the foreseeable future.

The pound was down 0.1% at $1.3740 after Britain’s finance minister unveiled the UK budget forecast.

In cryptocurrencies, bitcoin fell to $58,100 – its lowest level in a week and a half – in a move attributed to profit taking after hitting an all-time high of $67,016 last week. Since that peak, the cryptocurrency has fallen over 13% but was on track for its best month since February.

Bitcoin was down 3% for the day at %58,634.

(Chart: USDJPY:

(Reporting by David Henry in New York and Elizabeth Howcroft in London; Editing by Christina Fincher, Barbara Lewis, William Maclean and Marguerita Choy)

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