The dollar sell-off resumed after the FOMC risk was eliminated. The Fed has just reaffirmed its position that it is far from considering getting out of stimulus. Although the yen is still weaker over the week due to a strong rebound in the yields. Not far from the euro, the dollar is in third place in terms of its weak position. On the other hand, the Canadian dollar is the leader in terms of profitability, outstripping the growth of other commodity currencies.
The Bank of Canada announced that it will cut back on bond purchases and expects conditions for rate hikes to come sooner. The combination of the less dovish Bank of Canada and fiscal stimulus should be positive for the Canadian dollar in the short term.
The Bank of Canada left its interest rate unchanged at 0.25% while announcing that it would cut weekly net purchases of Canadian government bonds to a target level of C$3 billion per week. The Bank of Canada also raised its economic outlook, including an upward revision of its 2021 GDP growth forecast to 6.5%.
In terms of fiscal policy, the Canadian federal government is committed to stimulating the economy, even though the domestic economy will rebound significantly in 2H21. The recently released federal budget for 2021 included new spending measures totaling C$101.4 billion over the next three years.
USD/CAD touched its lowest level in more than three years at 1.2278 on Thursday and looks to be having a hard time making a convincing rebound. Earlier at the meeting, data from the US Bureau of Economic Analysis showed that the US economy grew by 6.4% annually in the first quarter of 2021 (first estimate).
This value turned out to be better than market expectations of 6.1%. In addition, the weekly number of applications for unemployment benefits fell to 553,000 from 566,000.
US Treasury yields continued to rise following the data, allowing the US dollar to gain strength against its competitors. So far, the yield on 10-year US Treasuries is up nearly 4% and the US dollar index is up 0.1% to 90.68.
However, the sharp rise in crude oil prices is helping Canadian commodities find demand and limiting the upside potential for USD/CAD. Currently, a barrel of West Texas Intermediate (WTI) oil is trading at its highest level since mid-March at $65.30, rising 2.6% daily.
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