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Rising Fed Hike Odds Lift US Dollar; USD/CAD Breakout on Hold Post-Canadian Data

Rising Fed Hike Odds Lift US Dollar; USD/CAD Breakout on Hold Post-Canadian Data

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Talking Points:

- USD/CAD fails to get traction through C$1.3145.

- Fed rate hike odds have jumped from Dec'17 to Jun'17 since NFPs.

- As market volatility stays elevated post-Brexit, it's a good time to review risk management principles.

The US Dollar has enjoyed a nice run the past two weeks, in part thanks to the best US Nonfarm Payrolls report of the year for June. While data hasn't been astounding, it has been solid; the Atlanta Fed's GDPNow growth tracker is pointing to +2.4% growth (annualized) in Q2'16. Against the backdrop of financial market stability in the post-Brexit world, the Fed may yet to have a window of opportunity to raise rates this year.

Over the past two weeks, as the USDOLLAR Index has shook off its congestion from June, amid a lack of other data on the level of the June NFP report, rising Fed rate hike expectations have been the catalyst for broad US Dollar strength. Pre-NFPs on July 8, Fed funds futures contracts were implying the Fed's next rate hike would come in December 2017.

Table 1: Fed Rate Hike Expectations (July 22, 2016)

Rising Fed Hike Odds Lift US Dollar; USD/CAD Breakout on Hold Post-Canadian Data

Today, rate expectations have been pulled forward to imply the first Fed rate hike is coming in June 2017. Even though expectations have been pulled forward six months - the easily explainable source of recent US Dollar strength - there is evidently more left in the tank. If the Fed comes out next week and chirps a hawkish tone - reaffirming its commitment to raise rates at least once this year, by December - there is still a six month gap in rate expectations to be closed from current market pricing.

Correlation is not causation, but the Fed has not raised rates unless market participants have priced in at least a 60% chance in the front month of them doing so. Continued progress in the 60% threshold to December 2016 should help the US Dollar over the coming weeks.

Elsewhere this morning, USD/CAD failed to get traction over the key C$1.3145 level, seemingly one of the only pairs (next to EUR/USD) not participating in broad US Dollar strength. While a breakout earlier looked possible, the much better than expected Canadian consumption and inflation data this morning has nixed the opportunity in the short-term.

Chart 1: USD/CAD Daily Chart (March to July 2016)

Please add a description for the image.

Statistics Canada released the June Consumer Price Index earlier today. The report showed June Headline CPI rose +0.2% from +0.4% in May (m/m), yearly Headline CPI stayed unchanged at +1.5%; the market had anticipated a slowdown to +1.4% (y/y). Concurrently, the National Statistics agency published its May Retail Sales data, which further supported the Loonie. The bulletin revealed retail trade grew +0.2% m/m vs expectations of a flat print. In addition, Retail Sales Excluding Auto also beat estimates at+ 0.9% m/m. It is important to note that the market had forecast a +0.3% rise.

All things considered, both retail sales and inflation data support the case for the the Bank of Canada to remain on the sidelines going forward despite calls for additional monetary stimulus by some market participants. Today's figures should help shake off concerns of a dip toward recession after disppointing economic data in recent months handicapped the Canadian Dollar.

Read more: ECB Keeps Rates on Hold; EUR/USD Shifts Lower after Draghi

--- Written by Christopher Vecchio, Currency Strategist and Diego Colman, DailyFX Research

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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