Good day,

Here’s what we’ll be following this month:

Inflation is the name of the game in the coming weeks, as Central Banks are walking on thin ice as they ponder how to best handle their monetary policies as economies spring back to life following immunization efforts. The CAD, EUR and GBP are making substantial gains against the USD. The yuan, meanwhile, has also outperformed the USD with a steep jump in value as China focuses on trade partnerships. CAD

Loonie is on roll against the USD, hitting a 6-year high in May with the USDCAD pair ending the month under the 1.2100 mark. As is the case with other developed economies, Canadian inflation pressures are building as provinces start easing pandemic restrictions, fueling economic growth. At its highest since 2011, ’s inflation is still lower than that of its American neighbor, further buoying the CAD.

Adding rising commodity prices to the mix, it’s no wonder the is expected to cut its bond- buying program by 1 billion per week again in July, strengthening the case for the USDCAD pair to stand firm in the 1.2000 area for the coming weeks. This could, in turn, force Canada’s exporters to revise their currency risk management strategy and plan for a stronger CAD in the foreseeable future. Without a strategy, a stronger loonie could translate into narrower profit margins when foreign-denominated revenues are converted back in CAD. USD

High inflation, historical commercial deficit and substantial spending spree joined forces to pressure the USD. The US Dollar Index (DXY) lost all its gain so far this year, moving in the 90.000 zone. Money supply is on the rise and Joe Biden’s 6,000-billion-dollar budget proposal will further fuel inflation. Hence, the downward pressures are likely to continue on the greenback.

Meanwhile, the Federal Reserve is not helping with its mixed signals mixed signals. Having recently said it wasn’t intending on tapering its Quantitative Easing program anytime soon, some of the Fed’s executives are now openly admitting that the pace of inflation has them talking about reducing stimulus. For the time being, they are using an overcautious approach to avoid causing a “taper tantrum”, which initiated fears of a market crash and a major spike in yields, last seen in 2013. The USD should remain under pressure as other G7 central banks are acting quicker. EUR

Inflation also is on the minds of Europe’s Central bankers, as the Old Countries are doing well on the vaccine front. Indeed, the EUR has dug its heels firmly thanks to an ongoing economic recovery of the Eurozone and the increasing status of the EURO as a reserve currency – causing capital inflows. The EURUSD pair is moving into June nearing the 1.22000 mark, recouping its recent losses. Strong numbers from the French and German manufacturing sectors also helped.

But the common currency isn’t out of the woods yet with fears of hyperinflation still looming. With German elections in September that could bring the Greens in power, the potential large spending program may well clip Euro’s wings. GBP

The Pound sterling has made substantial gains so far this spring, and May was no exception, as the GBPUSD pair gained almost 3%, maintaining itself well above the 1.4200 zone. Economic indicators are on the rise, with business confidence at its highest in three years. The GBP found itself strengthened in the wee hours of May, as the Bank of England warned that interest rate hike might be required sooner than the market expects.

With the Fed and the European Central Bank remaining hesitant, the pound sterling could still climb against major currencies, especially if the BoE decides to move faster with a more hawkish policy. Not to mention that Brexit risks have – for the most part – faded… CNY

Dipping well under the 6.3700 threshold in the final days of May, the Yuan has rallied against the USD. This happened as the as foreign investors piled into Chinese bonds and equity, further lifting the currency that has been already on the upswing following China’s economic rebound from the pandemic.

The CNY has been the best performer in Asia this year.

This has forced the People’s Bank of China to play its hand wisely: while its rate-fixing policy supported the rally, helping contain the rising prices of imports, the PBoC hints that it wants to keep a lid on the Yuan, which could very well hurt exports.

A plot twist: China is in talks with Australia and New Zealand to join the Trans-Pacific Partnership. The trade deal that was initially conceived by the USA to pressure – then dropped by the Trump administration – could further consolidate China’s influence in the region. COMMODITIES

Backwardation: this word will make headlines in the coming weeks. As the largest economies rebound from the pandemic amid massive government stimulus spending, commodity sectors such as Lumber, Oil, and agriculture have skyrocketed. These markets are now showing the steepest backwardation in aggregate over the last 14 years, as premiums for commodities delivered now versus later is the highest it has been since at least 2007. This market dynamic is signaling how strong the world’s demand is for raw materials, and how tight supplies are.

This could be an opportunity for companies exposed to commodities to book their purchases in advance with the use of future contracts. This way, a lumber buyer could enter lumber future contract for November and get an approximate 23% discount from the spot price. OUR MONTHLY READS

NO SLUMBER FOR LUMBER

The U.S. Department of Commerce is seeking to double tariff rates against most Canadian softwood producers even as lumber prices hover around record highs. Rates applied to individual companies vary in impact; in some cases, they could triple. Softwood lumber prices have already shot up 340 % in the past year, setting record prices. To put the new tariffs into context, in 2019, 1,000-board feet of 2x4s was selling for 300 USD. Now, the same amount fetches 1,600 USD. The steep increase in tariffs is ‘’troubling’’ for the Canadian industry, writes the Star. https://www.thestar.com/business/2021/05/21/us-commerce-department-doubles-tariffs-on-canadian- softwood-lumber-imports.html

THE CRYPTO COLLAPSE

As the flagship cryptocurrency, the Bitcoin, shed more than 30,000USD in value, or 50%, in the past two months, questions arise as to the cause of the part of the reason for bitcoin’s weakness seems to be a temporary reversal in broader acceptance for cryptocurrency, as well as regulatory concerns, triggering a liquidation event. Not to mention Elon Musk’s sudden change of attitude toward the cryptocurrency, saying he would not have anything to do with it shortly after having bought $1-billion worth of the thing, as CNBC reports. https://www.cnbc.com/2021/05/19/the-crypto-collapse-heres-whats-behind-bitcoins-sudden-drop.html

VIRTUAL CONSULTATION DAY FOR SMES

To help support Quebec SMEs, FINMETRIX is giving confidential consultations, free of charge and without obligation, every Friday. The objective is to assess the current situation and find a suitable currency risk management solution. Do not hesitate to share this with companies in need.

Duration: 30-minute videoconference session To register, please send an e-mail: [email protected]

If you have any questions, please contact us.

Have a great day.

FINMETRIX

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