Stefano Rebaudo
(Reuters) – The dollar rose ahead of key U.S. economic data on Wednesday, with investors also awaiting a monetary policy meeting in Canada that could kick off a cycle of rate cuts.
Investors are awaiting US services data on Wednesday followed by new employment data later this week.
The dollar lingered at a nearly two-month low as signs of a weakening U.S. economy on Monday strengthened the case for an earlier interest rate cut by the Federal Reserve.
The Bank of Canada meets a day before the European Central Bank meets on Thursday.
Canada’s annual inflation rate slowed to a three-year low of 2.7% in April, prompting money markets to see an increased likelihood of an interest rate cut this month.
Markets are pricing the likelihood of a Canadian rate cut on Wednesday at around 80% and discounting 65 basis points (bps) for policy easing by the end of the year.
“We believe the Bank of Canada is overdue and a dovish turn will be adopted by all smaller G10 countries such as New Zealand,” said Themos Fiotakis, global head of currency strategy at Barclays.
The Canadian dollar reached the midpoint of a multi-month range at C$1.3683 per dollar.
Quotes rose 0.19% to 104.36. It hit 103.99 on Tuesday, its lowest level since April 9.
“The main thing is that markets are demanding the Fed to cut rates almost as much as they are demanding the ECB,” said Barclays’ Fiotakis.
“The divergence in fundamentals has not been assessed. But the dynamics of growth and inflation will make the Fed much less accommodative than other central banks,” he added, arguing that he sees an opportunity for investors to go long dollars.
Markets also kept a close eye on futures, which hovered near four-month lows on Wednesday.
“If low oil prices cause deflation to become a global phenomenon again, we wouldn’t expect more policy divergence or a weaker dollar as that would trigger dovish behavior across the board,” said Thierry Wiseman, global currency strategist at Macquarie.
The euro was down 0.1% at 1.086 against the US dollar.
Analysts take it for granted that the ECB will cut the rate by 25 bp. this week, but are not sure about its prospects.
The yen fell about 0.8% to 155.90 per dollar, paring more than Tuesday’s gains as investors cut bets on emerging markets.
Real wages in Japan fell for the 25th month in a row in April as inflation outpaced nominal wage growth.
On Tuesday, Bank of Japan Deputy Governor Ryozo Himino said the central bank must be “very vigilant” about the impact of currency weakness on the economy and inflation.
Investors see the Bank of Japan tightening its policy in the future, although not enough to strengthen the yen.
The Australian and New Zealand dollars were little changed after domestic economic news turned out to be less gloomy than investors had feared.
Emerging markets have stabilized after several turbulent days.
The Mexican peso steadied after falling about 4% against the dollar and nearly 6% against the yen after the ruling leftist Morena party was re-elected in a coalition with a two-thirds majority in both houses of Congress.
Some analysts say expectations of greater government control over the economy are weighing on the Mexican currency.
“President-elect Sheinbaum has demonstrated responsible fiscal policy and central bank autonomy,” Macquarie’s Wiseman said, arguing the sell-off in Mexican assets appears exaggerated.
“The dust may clear soon, leading to a period of outperformance for the Mexican peso,” he added.
The Indian rupee rebounded from a seven-week low as election results showed voters returned Narendra Modi to power by a much smaller margin than expected.