The big story over the last few days has been how investors have been reshuffling their assets in order to suit the changing dynamics of monetary policy.
Ever since Fed Chairman Ben Bernanke spoke in his press conference last week about what had previously been speculation, namely that the Fed is likely to taper its monthly asset purchases later this year, we have been seeing a rethink of how market participants view liquidity.
This has led to a slump in stock prices, a general lack of demand for risk commodities, rising yields in long-term US treasuries and strength in the US dollar. Monetary stimulus generally acts to debase a currency, with all things being equal, and therefore a lowering in the expectations for future stimulus has proven beneficial to the dollar.
EUR/USD climbed 0.16% to 1.3142 by mid-afternoon in New York, while USD/CAD rose by the same percentage to 104.73. Earlier in the session the US dollar hit its highest level against the Loonie since October 2011.
The Canadian dollar has been struggling along with other currencies, such as the Australian dollar and the New Zealand dollar, that are tied to economies heavily reliant on commodity exports.
Commodity prices have not only been hit by the expectations for stimulus but by a steady stream of bad news out of China. Last week PMI manufacturing data for China showed a contraction, falling to a nine-month low, and overnight the Chinese stock market saw steep falls after the People’s Bank of China suggested the era of cheap credit could be ending.