USD / CAD – Canadian Dollar on back burner

– Traders awaiting US ADP employment and ISM Services data.

– Lower Eurozone inflation fails to spark excitement.

– US dollar opens mixed but with little change.

USDCAD: open 1.3573-77, overnight range 1.3555-1.3585, close 1.3567, WTI $85.39, Gold, $2271.85

The Canadian dollar is adrift. Prices are little changed inside a narrow USDCAD range of 1.3540-1.3600 and are likely to remain in that band until Friday’s US and Canadian employment reports.

The Canadian dollar may have limited upside as foreign investors shun the country due to the perception that it is a high-tax environment with an anti-business government. Those investors point to the latest surge in Canadian carbon taxes, which rose 23% on April 1. That is a 400% hike since 2019.

The government claims that the Carbon tax rebates paid to households more than offset the impact of the carbon tax. The Parliamentary Budget Office (PBO) disputes that claim and says “Most households in provinces under the backstop will see a net loss resulting from federal carbon pricing under the HEHE plan. That is, household carbon costs will exceed the Climate Action Incentive payments households receive.”

The tax hike makes the Bank of Canada’s inflation-fighting task that much harder. For starters, it increases energy costs for everyone, businesses, and consumers alike. Businesses facing higher input costs due to the increased price of energy will pass these costs onto consumers in the form of higher prices for goods and services.

Nevertheless, the outlook for US interest rates is the only factor driving FX markets. Analysts are flip-flopping between expecting three or more rate cuts or just two or less. Fed policymakers Loretta Mester and Mary Daly still believe that the Fed will cut rates three times in 2024.

US ADP Employment and ISM Services PMI reports will keep the interest rate debate going until Friday’s nonfarm payrolls data.

EURUSD drifted in a 1.0764-1.0781 band. Traders largely ignored better than expected Eurozone Core-inflation, which fell to 2.9% y/y from 3.1% in February.

GBPUSD is trading quietly in a 1.2563-1.2588 range with the surge in the US 10-year Treasury yield to 4.38% limiting gains.

USDJPY traded uneventfully in a 151.44 to 151.80 band with prices underpinned by higher US Treasury yields.

AUDUSD traded in a 0.6503-0.6525 range, garnering a bit of support from a modest improvement in China Services PMI data.

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