Today’s U.S. economic reports reminded investors of the dollar’s appeal. The labor market is strong and the Federal Reserve will be actively reducing stimulus this year driving rates higher. Ten year Treasury yields rose above 1.7%, matching a two year high. According to the minutes from the most recent Federal Reserve meeting, many participants felt that the balance sheet could be reduced at a faster pace and conditions for a rate hike could be met sooner if inflation remained high and labor market improvements continued. After dipping in December, oil prices rebounded sharply over the past 3 weeks and the job market is healthy with ADP reporting its single largest increase in private payrolls last month since May. It was no surprise then that dollar bulls remained in control with the greenback recuperating overnight losses against the Japanese Yen and euro. The commodity currencies were hit the hardest by the gains in the dollar and sell-off in stocks.  Markets are finally considering the effects of rate hikes this year.
Meanwhile the focus is shifting to Friday’s jobs report. Non-manufacturing ISM is scheduled for release tomorrow and the employment component of this report is one of the strongest leading indicators for non-farm payrolls.  With ADP rising 807,000 in December, investors expect a strong report. If their view is reinforced by tomorrow’s ISM, we will see the greenback extend its gains into NFPs. 
The weakest currency today was the Canadian dollar. Despite a sharp rise in building permits (nearly four times more than expected), the heady housing market may be cooling with house prices growing at a slower pace.  This is a big week in North America with the Canadian dollar in as much focus as the greenback. The country’s trade balance is due for release tomorrow along with labor market numbers on Friday.  Job growth is expected to slow significantly after the country added 153K jobs in November.  USD/CAD is trading higher on expectations for stronger job growth in the U.S. and weaker job growth in Canada. Restrictions are also returning in Canada. A curfew has been announced for Quebec, restaurants can only provide takeout or delivery and gatherings are no longer allowed. Ontario also closed indoor dining, limited capacity and cut gatherings. These restrictions will slow the recovery and reduce demand for the loonie, putting USD/CAD on a path towards 1.30.
European currencies on the other hand rallied on Wednesday despite the downward revisions to Eurozone PMIs. Infections are at record levels but countries like Germany, France and Belgium are easing quarantine rules. In recent days, Belgium exempted vaccinated close contacts from quarantining, France shortened its isolation period for positive patients from 10 to 7 days and can end isolation after 5 days if they test negative with no symptoms for 48 hours. Today, Germany’s health ministry also recommended reducing the quarantine period to 7 days from 14 days. This falls more in line with the U.S.’ Center of Disease Control’s advice for a 5-day isolation for asymptomatic patients.  The U.K. announced today that fully vaccinated travelers no longer need to submit a PCR test for arrival (a negative rapid within 48 hours is sufficient). Investors are applauding these efforts at reopening the economy by driving euro and sterling higher.

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