At some point economic data, the relative strength of economies and rate differentials will matter, but that day isn't today.
The Bank of Canada surprised markets yesterday with a 100 basis point rate hike, taking rates to 2.50%. The Bank of Canada continuedto forecast solid (albeit lower) growth this year and next. Canadian 2-year yields at 3.38%, or 14 bps above Treasuries.
Initially, USD/CAD fell to 1.2933 but today the pair has completely reversed and touched 1.3223.
In Australia today the jobs numbers were sensational at +88.4K in June compared to +25K expected. The unemployment rate fell to a record low at 3.5% compared to 3.8% expected. The best that could muster was a 40 pip bumb which has now reversed down to levels not seen since the height of the pandemic scare.
The theme today is fear. It's a mixture of fear about higher rates and fear about lower growth.
The answer appears to be: Sell everything and hold US dollars in cash. Not even bonds are being spared today with Treasury yields up around 10 bps (out to 10s).
It's a classic deleveraging trade and speaks to the deep uncertainty in the market.
Eventually, the market will price in either lower growth or lower inflation and even one of those is enough. It's tough for me to price in long-term inflation when oil prices are now down 28% from the recent highs and gasoline prices nationally in the US are down for 31 straight days.
But the market isn't looking to mid-2023 yet and where prices will be then, so let this washout happen. There's no telling where it will end.
