The maple leaf currency continues to appreciate

May 5, 2021
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The dollar regained some strength the past few days and forced the euro back to the 1.2000...

The dollar regained some strength the past few days and forced the euro back to the 1.2000 mark. The parity had reached 1.2150 before the FOMC meeting last Thursday. Fed Chair Jerome Powell once again repeated that the Fed will wait for a ‘string of months of economic recovery’ before tightening the monetary policy.  The objectives of a return to full employment and inflation at 2% over the long term remain prerequisites for any change. A part of the market hoped that Mr Powell would hint at an imminent tapering of bond purchases, opening the door to a rise in interest rates. It was therefore disappointed, which triggered this bout of weakness in the greenback. Mr Powell also mentioned that the matter of tapering had not been discussed by the central bank. US Treasury Secretary Janet Yellen played down fears that budget spending would lead to inflation. She believes the spending will be spread over a decade and the Fed was carefully monitoring price developments and had the necessary means to contain them. But as the indicators still show dynamic economic activity in the United States, this bearish movement was quickly corrected. The US economy grew 6.4% in the first quarter compared to 4.30% in the last of 2020. Household consumption jumped 10.7%. Capital expenditure on equipment rose 16.7% while sales of existing homes increased 25.3% year on year. This confirms a clear acceleration in activity, a result of both a technical rebound and the stimulus packages. The economic situation contrasts completely with that in Europe where the Gross Domestic Product of the eurozone actually fell by 0.6% in the first quarter after dropping by 0.7% the quarter before that. This new fall caused by the lockdown measures marks the second technical recession since the pandemic and is taking GDP further away from its pre-crisis level.

In Switzerland, the advanced economic barometer published by the KOF has taken off. This indicator came out at 134 points in April against 118.0 in March setting a new record. Before plunging during the crisis last spring, this leading indicator of the economy had been hovering around the 100 point mark for five years. Despite Thomas Jordan’s statements reiterating that the franc is still overvalued, investors continue to favour it and our currency has fallen back below 1.1000 against the single currency. The Scottish Parliament election will take place tomorrow to elect all 129 Members of Parliament. If Prime Minister Nicola Sturgeon’s pro-independence SNP party wins with a solid majority, Scotland could once again vote for independence. This weighed on the pound and the uncertainty favoured the Swiss franc. For its part, the Swiss National Bank recorded a net profit of CHF 37.7 billion in the first three months of this year. This contrasts with the 38.2 billion loss recorded during the same period last year.

After the surprise announcement by the Bank of Canada that it was reducing its asset purchases from CAD 4 billion to CAD 3 billion per week, the maple leaf currency continues to appreciate and fell below 1.2300 against the US dollar. The Canadian dollar was not only supported by the central bank’s decision but also by the rise in commodity prices and to some extent the retreat of the greenback. The next important meeting will be the publication of employment figures on Friday. The figure should reflect the gradual improvement in the labour market. But if this were to significantly beat market expectations, the Canadian dollar will no doubt continue to rise.

The Central Bank of Australia left its interest rates unchanged yesterday. While reaffirming its desire to keep rates at low levels at least until 2024, the bank has revised upward its growth prospects for 2021 and 2022 as well as those relating to the job market. For the same period. Governor Philip Lowe kept the yield target until April 2024 at 0.10%. The next meeting will be on June 1 but Philip Lowe said the council will decide at the 6 July meeting whether or not to extend the time horizon to November 2024.

The eagerly awaited monetary policy meeting of the Central Bank of Turkey will be held today. Bank Governor Sahap Kavcioglu said inflation is expected to peak in April but the current weakness of the Turkish lira can only increase inflationary pressures. He is still expected to keep rates unchanged at 19% at this meeting, but government pressure to cut rates is likely to continue. Rising inflation and falling rates do not herald easy days for the Turkish currency.

On the agenda, the meetings of the banks of England and Norway are expected tomorrow, while in terms of economic data, US and Canadian employment figures will be published on Friday.