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The Canadian dollar was the star performer against virtually every major overnight. Fuelled by yesterday’s rate hike, to which there was little to no immediate reaction (as the move was expected), the Loonie appreciated steadily as a result of the decision throughout the day—even in the face of a rather dovish statement (which, again, was not a surprise). However, after such a downward spiral for the CAD over the last month, especially when looking at how the currency traded against the euro, we are not surprised to see some appreciation, as the CAD had moved down over 1100 points against the common currency. Many of the moves today can be associated with stop loss selling and position squaring as this has been a volatile pairing, but with all the trade proposed between Europe and Canada and their differing fundamentals, this could certainly continue to be an active trade over the medium term. We still feel that, although the crosses might be volatile, USDCAD has to break some fairly significant barriers on both sides of the market to push out of the broader range. And, unless there is no market disruption or clear trend in equities, USDCAD may not break out until the fall (although the current range is quite large). Risk flows are once again positive with North American indices trading up around one percent at the close. The Nikkei and TOPIX bucked the trend and were slightly negative amidst positive performance from the Hang Seng, S&P/ASX 200 and Shanghai, but European bourses are firmly rooted in the black, all trading between one and two percent up. Earnings are in focus today with Wells Fargo and Morgan Stanley both reporting higher-than-expected earnings and profits. Apple, Altria, Coca-Cola and US Bancorp also all reported higher-than-expected numbers. Now, this normally would signal an overwhelmingly negative day for the US dollar, with risk returning to the market and investors pouring into high-yielding currencies and exiting safe haven plays (such as US treasuries). This isn’t the case this morning, however, as the GBP is off 0.20% and the EUR is trading down over 0.50%. Domestic situations are coming into play more and more (versus risk plays, although these are still prominent), and today’s meagre bond auctions in Germany and Portugal have been negative for the euro. And Friday, of course, we will gain some visibility into the European bank stress tests (although much may be leaked ahead of time, as we saw in the US). Hopefully this will be a non-event, as the big banks are expected to pass, but over 90 institutions are slated for review and the second tier and regional banks are certainly at risk. Cable has Wild RideCable had an interesting path overnight: at the fixing the GBP shot down over 100pts in a matter of minutes, but quickly retraced half of the move and proceeded to actually trade higher than starting levels over the next hour. However, since then it has been on a slow decline and is off around 0.30% on the day against the USD. Some feel that the BoE’s seven-to-one decision to hold rates (not the rate decision but the voting tally was released today) was a surprise and is contributing to Cable weakness, although this was largely expected. Big Ben to Testify, Market to Search for CluesAlong with earnings announcements, all eyes will be watching Ben Bernanke’s semi-annual testimony to congress. Usually this is a lot of words and not a lot of unexpected news, but we get the feeling that this may be watched more closely than usual as there is heightened uncertainty regarding the direction of the US economy. I’m sure his challenge will be to effectively say nothing and give no strong directional clues over the multi-hour speech and Q&A session, but the market is looking for clues as to whether the recovery is real or the economy is heading into a double dip recession as stimulus wears off. Perhaps the US banks can bail out the people this time if that is the case! Have a great day. By Tyson Wright, Senior FX Trader, Source: XE.com
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