Talking Points:

British Pound Gains on Hawkish Comments from BOE’s Forbes
Canadian Dollar Follows Crude Oil Lower on Supply Glut Bets
US Dollar Higher Ahead of 6- and 3-Month Treasury Bill Sale

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The British Pound outperformed in overnight trade following hawkish comments from Bank of England official Kristin Forbes. A member of the rate-setting MPC committee, Forbes said the UK is in a “solid recovery” and warned that the benchmark policy rate will need to rise before headline inflation hits the target 2 percent. She added that keeping rates low for too long carries distortion risks.

The US Dollar likewise advanced, rising alongside prices for Treasury securities ahead of an auction of 3- and 6-month bills later in the day. The near-term tenor of the paper on offer suggests traders may get a sense of the markets’ Fed rate hike bets in the borrowing costs prevailing at the debt sale.

Signs of robust demand suggest investors are betting the central bank will prove to be relatively dovish, keeping rates low. While the greenback rose considering the assets on offer are denominated in USD terms, the move seems unlikely to have follow-through considering the longer-term negative implications of a more accommodative FOMC for the benchmark currency.

The Canadian Dollar proved weakest on the session, tracking crude oil prices downward. The WTI and Brent benchmarks both came under pressure following reports that OPEC may boost output to a record 33 million barrels per day (b/d) after sanctions are removed from Iran. Meanwhile, the US agreed to an exchange deal with Mexico supplying as much as 100k b/d.

The Bank of Canada has previously cited weaker oil prices to as a reason to cut interest rates. Indeed, the correlation between Canadian front-end bond yields – a proxy for the priced-in policy outlook – and the WTI contract is now 0.60 on 20-day percent-change studies.

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