- DXY on the backfoot as stocks rise and BoC tapers.
- ECB and the Fed are next in focus for a catalyst for the DXY.
The greenback was on the back foot yet again and sitting around multi-week lows and unable to pick itself up vs most major currencies.
The market is fixated on central bank divergences ahead of the European central bank today and the Federal Reserve next week following a surprise announcement from the Bank of Canada on Wednesday.
As a result of a drop in US Treasury yields, the allure for the greenback is fading.
The Bank of Canada announced that it is cutting its weekly bond purchases by 25% to C$3bn when it held its key overnight rate steady at 0.25% on Wednesday’s policy meeting.
This has sparked a flurry of risk-on in the markets due to the improvement in economic activity.
The BoC was noting that “as vaccines roll out and the economy reopens, consumption is expected to rebound strongly in the second half of this year and remain robust over the projection.”
The BoC said it now expects economic slack to be absorbed in the second half of 2022, from a previous forecast of into 2023.
This makes for a highly anticipated round of subsequent central bank meetings, starting with today’s decision from the ECB.
The central bank is not expected to change policy when it meets but it will set the stage for June, when policymakers have to decide whether to slow bond buying.
Meanwhile, traders will be looking for any positive comments about the economic outlook or hints of tapering bond purchases.
In such a scenario, the DXY would be expected to come under even more pressure as the euro lifts off.
S&P 500/DXY negative correlation
Meanwhile, the DXY is negatively correlated to stocks and if the indexes continue to advance higher, the DXY would be expected to melt to the downside and deeper into support.
If, on the other hand, US stocks fail to break higher, then there are bullish prospects for the greenback.