Currencies: Dollar clings to gain against loonie after Bank of Canada strikes dovish tone

The U.S. dollar extended a modest gain against its rivals on Wednesday, and turned higher against the Canadian dollar after the Bank of Canada left interest rates unchanged and sounded more cautious than anticipated on future interest-rate increases.

What are currencies doing?

The ICE Dollar Index DXY, +0.26%  was up 0.2% to 93.574, recovering from a slip into negative territory that followed economic data. The index was up 0.7% at the halfway mark through the week. The broader WSJ U.S. Dollar Index BUXX, +0.18%  was up 0.2% at 86.96.

The buck rallied against the Canadian dollar USDCAD, +0.8592% buying C$1.2798, its highest level in three days, compared with C$1.2687 on Tuesday, after the Bank of Canada’s comments.

Also read: Goldman Sachs thinks the U.S. will ditch Nafta, sinking the peso and loonie

The British pound GBPUSD, -0.4166% which continues to be rattled by Brexit and lack of progress in the negotiations between London and Brussels, fell to $1.3376 from $1.3442 late Tuesday in New York. The euro EURUSD, -0.2199%  was also softer at $1.1795, down from $1.1826 in the previous session.

Against the Japanese yen USDJPY, -0.36% the dollar fell to ¥112.25 from ¥112.60 late Tuesday in New York.

The Australian dollar AUDUSD, -0.5653%  slipped to its lowest level since the beginning of the month after the country’s third-quarter GDP growth reading failed to meet consensus expectations at 2.8% annual growth versus 3% expected, according to FactSet. The Aussie last bought $0.7562, down from $0.7606 late Tuesday.

What’s driving the markets?

The dollar was helped by the sudden turn in the loonie, as the Canadian dollar is also known. Traders had expected hawkish-sounding comments, supportive of an interest-rate increase in the first quarter of 2018 from the Bank of Canada on Wednesday, but instead heard words of caution, sending the Canadian currency lower. The BOC also left interest rates unchanged, which was in line with expectations.

Back in the U.S., investors continued to focus on tax-cut negotiations after the Senate passed its version of the bill over the weekend. Traders are watching for lawmakers in the Senate and the House to reconcile versions of their tax bills, which needs to be done before a final bill is sent to President Donald Trump to sign into law.

A sticking point has emerged over the corporate alternative minimum tax, a provision that companies and top House Republicans want to come to an end. The Senate’s tax bill still has the provision. The corporate AMT is meant to make corporations pay a minimum tax of 20% if breaks make their tax bill too low.

Read: Here’s why the corporate AMT is a hurdle to a final tax bill

In other drivers, nonfarm payrolls, which will shed additional light on the health of the U.S. economy are due on Friday, following private labor market data on Wednesday, which showed employment growth was solid in November.

In the U.K., the pound dropped after U.K. Brexit Secretary David Davis reportedly said the government hadn’t carried out any economic assessment on how Britain’s exit from the European Union will impact different parts of the British economy as it’s too early in the Brexit process. Britain’s Prime Minister Theresa May was in the U.K. parliament Wednesday fending off criticism over her government’s handling of Brexit talks.

What are strategists saying?

Following Wednesday’s ADP employment data, Capital Economics chief U.S. economist Paul Ashworth wrote it was “consistent with our estimate that the official nonfarm payroll employment will show a 200,000 increase when the data are released this Friday.”

“After the hurricane-related disruption that hit September’s payroll tally, prompting a bounceback in October, employment growth should now revert to its previous trend of between 150,000 and 200,000 per month,” Ashworth added.

“The BOC’s stance was in line with out more-dovish-than-consensus view and we maintain our call that the next rate hike will occur at the April meeting,” said Christian Lawrence, senior market strategist at Rabobank with regards to the selloff in the Canadian dollar.

What are the data?

ADP’s November report on private-sector jobs showed 190,000 jobs added, down from 235,000 in October, but above expectations for an increase of 180,000 private jobs.

Meanwhile, productivity rose 3% in the third quarter, just below the MarketWatch consensus estimate of 3.3%, and in line with the previous quarter’s report. Unit labor costs for the same period slipped 0.2%, versus an expected increase of the same amount.

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