Yellen Re-Ignites USD; Poloz Sinks CAD

North American central bankers sent their currencies in opposite directions Wednesday as the market refocuses on fundamentals. The US dollar was the top performer while the Canadian dollar lagged. The Australian employment report is due up next. A new CAD trade has been issued. GBPJPY has been stopped out.

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Yellen said the US economy is near maximum employment and inflation is rising, warranting gradual rate hikes. Waiting too long would risk a “nasty surprise. She added that the timing of the next hike will depend on data in the 'coming months'. That essentially rules out a February hike but leaves March and May on the table and raises the chance of a June hike, which is only 72% priced in.

The US dollar jumped, especially USD/JPY as it surged to 114.30 from 113.50. The rally entirely unwound USD/JPY selling on Wednesday. The dollar also made strong moves against the euro and sterling to mitigate some of the large moves a day earlier.

The biggest move was in USD/CAD as the pair rallied 225 pips after the Bank of Canada decision. The initial kneejerk was lower on the statement but it reversed 10 minutes later and then continued higher. A big reason for the jump was Poloz indicating that a rate cut was still on the table.

He said a cut would come if downside risks like protectionism or foreign weakness materialized but once the markets heard the words “cut on the table,” it was a one-way trade in USD/CAD. It was compounded by his lamenting of uncertainties on incoming US policy and worries about CAD strength.

Given that the BOC remains neutral and a large dose of fiscal stimulus is in the pipeline, the huge move might be an overreaction but technically, the outside reversal is impossible to ignore.

Another currency we're watching closely is AUD/USD. It jumped above the December high and the 200-day moving average yesterday but sank back below Thursday in a 55-pip dip. That leaves a more muddled picture but it may be resolved by the December employment report at 0030 GMT. There has been almost no economic data from Australia so far this year so look for a sizeable reaction. The consensus is for 5.7% unemployment and 10.0K new jobs but watch the full-time/part-time breakdown.