Over the last couple of days, oil prices have risen to pandemic-era highs and are approaching the highest levels since 2014. Stock indices have stabilized at or near record levels. And US treasury yields are up a bit but nowhere near where they were in May when fear of inflation was running rampant. Under those conditions, you would expect that the Canadian dollar should be strengthening, but instead the Loonie has given up a penny over that period and is now trading at its lowest level in about a month. The move in USD to CAD has everything to do with evolving expectations of what the US Federal Reserve is likely to announce tomorrow. So far, Fed officials, led by Chair Jerome Powell, have stressed that easy monetary settings will stay in place for some time to come. That has put the Fed at odds with the Bank of Canada which has began a process for cutting back on asset purchases and indicated that rates will rise in 2022. That difference in projected monetary policy has motored the rise in the Canadian dollar this year. But there is a growing (but still minority) view that Fed may provide hints of plans to start tapering its bond purchases as well. That view is what is driving the Canadian dollar down this week despite otherwise good conditions.
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