The U.S. dollar continued to weaken overnight, adding to steep losses yesterday. The greenback fell to its weakest level in over a year versus the Euro and the Dollar Index has fallen to its lowest level since early November. The majority of the news has come from abroad but some domestic political issues have added to the greenback’s demise.
The future of “repeal and replace” of Obamacare seems to be in doubt again after Senate Majority Leader Mitch McConnell delayed a vote on the GOP’s health care bill until after the July 4th recess. A delay or a political failure by the leading party would call into question other priorities that would favor the economy and the U.S. dollar, namely infrastructure spending and tax reform.
Today’s economic docket is light with only pending home sales expected out at 10 a.m. EST. Sales are expected to rise 1.0% month over month after contracting 1.3% in April.
The EUR/USD has been on wild ride over the past few days and today is no different. The common currency rallied yesterday on what was seen as hawkish comments from ECB President Mario Draghi. The trend for the Euro continued overnight. Draghi seemed to downplay deflation risks and even used the word “reflationary” in describing the price pressures in the Euro zone. Traders took these comments as an indication that the central bank may be close to normalizing monetary policy. As a result, the Euro climbed to its highest level in more than a year against the U.S. dollar.
However, the Euro is falling drastically early this morning as the following headline flashed across Bloomberg terminals: “ECB Said to See Market as Misjudging Draghi Speech on Stimulus.” Details are developing, but our knee-jerk analysis is that the Euro may have reached a near-term top against the U.S. dollar.
The Canadian dollar extended recent gains against the U.S. dollar overnight. The loonie has gained 1.5% over the past 3 trading sessions and is currently 3.0% stronger in the month of June. The loonie’s progress is impressive due to the fact that the recent recovery in oil has subsided.
Today’s strength can be attributed to hawkish comments by Bank of Canada head Stephen Poloz. He said that a rate increase in July remains in play while speaking during an interview with CNBC Europe. He characterized current rate policy as “extraordinarily low.” OIS is now implying a near 40% chance of a rate hike in July.