What a difference a day makes! The US dollar has bounced back by 1.2% from yesterday’s three year lows against the Canadian dollar. The move came as stocks plummeted yesterday and are mixed today. The move in stocks was precipitated by a drastic move up in interest rates on both sides of the border. Rising bond yields make stocks less attractive. The move up in yields in turn is a reflection of two things; inflation expectations as well as a red-hot economic recovery after the pandemic. As we described a couple of days ago, the market seems to have reached an inflection point where the logic of more fiscal/monetary stimulus leading to higher asset prices is beginning to falter. So, in a convoluted way, bond yields are driving the USD to CAD exchange rate, which ironically is sort of back to basics as far as exchange rates are concerned. While we are trading at near our short term Canadian Dollar Consensus Forecast, we do not expect that this bout of volatility is over yet. If yields keep pushing up we will begin to hear quite a bit about the spread between the US and Canadian yields as a driver of exchange rates.
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