Written by the Market Insights Team
What took you so long?
Kevin Ford – FX & Macro Strategist
Between Friday afternoon and yesterday’s close, the dollar slid 0.8% following Moody’s downgrade of the U.S. sovereign rating to Aa1. Unlike past rating cuts, where the greenback rallied on risk aversion. this time, the reaction has been notably different. Outside of FX, markets barely flinched, reinforcing the sense that this was more of a formality than a shock. The real question isn’t the impact, it’s why it took Moody’s so long. As the final of the three major rating agencies to lower U.S. debt, the move was widely expected, which likely explains why equities barely budged on Monday.
But timing is everything. Why now? Debt ceiling debates, rising fiscal spending, tax reforms, none of these are new. Yet Moody’s may be anticipating further fiscal deterioration, with Congress now discussing the next round of tax cuts and another wave of government spending. Treasury markets have certainly been pricing in the expectation of heavy issuance ahead, signaling that demand for U.S. debt might not be as strong as it once was. That could help explain why the 30-year yield flirted with 5%, though it has since pulled back by 10 basis points.
It’s safe to say Scott Bessent isn’t thrilled about how high Treasury yields are trading. Nearly $3 trillion in U.S. debt mature in 2025, much of it short-term. Can the market absorb that? The government will likely extend a large portion of this debt to 10- and 30-year issuances, adding more pressure to rates. Moody’s timing couldn’t be worse for the Treasury.
With traders scaling back expectations for rate cuts, investors navigating a flood of new issuance, and trade policy uncertainty still looming, the second half of the year could be a tough one for fixed income, and the U.S. dollar.
CAD steady ahead of April CPI
Kevin Ford – FX & Macro Strategist
Among the select leaders invited to Pope Leo XIV’s inaugural Mass, Canadian Prime Minister Mark Carney and U.S. Vice President JD Vance took the opportunity to discuss trade. But much like previous conversations, it was more of the same, discussions around fentanyl, border security, and defense spending, without any concrete progress.
While fiscal concerns have weighed on sentiment toward the U.S. dollar, the Canadian dollar’s upside remains capped by expectations of a dovish shift from the Bank of Canada (BoC). April’s disappointing job numbers which saw a rise in unemployment to 6.9% have increased the likelihood of a BoC rate cut in June. Meanwhile, as noted last week, the newly re-elected Liberal government is proposing C$77 billion (2.5% of 2024 GDP) in additional deficit-financed fiscal stimulus over the next four years. The plan prioritizes infrastructure, defense spending, and new housing development, alongside personal and corporate tax cuts.
In the FX market, the Canadian dollar opened the week at 1.398, but its attempts to push higher have stalled near 1.40. Selling pressure resurfaced last week, bringing the pair back to its one-year average of 1.394. The widening spread between U.S. and Canadian short-term yields has added to the pressure, keeping 1.39 as a key support level in the near term.
Looking ahead, the weekly chart suggests price action may remain contained between the 60-week SMA at 1.392 and the 40-week SMA at 1.403. FX volatility has eased since April, and neutral positioning in the FX options market, reflected in one-month risk reversals, points to a range-bound outlook. However, if bearish sentiment toward the U.S. dollar deepens, the CAD could test support levels below 1.389.
Euro firms as confidence grows
George Vessey – Lead FX & Macro Strategist
The euro climbed toward $1.13 on Monday, extending its recovery from 1-month lows last week, fuelled by broad USD weakness following Moody’s downgrade of US credit. ECB President Christine Lagarde reinforced market sentiment, signalling that the central bank will not resist a stronger euro.
Rather than framing appreciation as a threat, she called it an “opportunity,” linking it to global capital shifts and diminishing confidence in US policy. Markets are responding, with long-dated euro call options gaining traction as one-year risk reversals rise above one-month levels – a sign that this rally is structural, not just a temporary bounce. Technically, EUR/USD still needs to clear the 21-day moving average to solidify the uptrend, but its first close above the 55-month moving average since 2021 suggests growing market conviction. The missing catalyst for a push toward $1.20 may not be short-term headlines, but rather steady reserve rebalancing, policy stability, and the ECB’s strengthening credibility.
On the data front today, all eyes are on Eurozone consumer confidence, which is expected to rise for the first time in three readings, providing another boost to sentiment.
Mexican Peso gains
Kevin Ford – FX & Macro Strategist
The Mexican Peso, along the Swedish Krona leads the pack today, posting the strongest gains among major currencies against the U.S. dollar, climbing 0.95 percent over the last two days. The Mexican peso gains along with its Latin America peers, as a downgrade in the US credit rating has put pressure on the dollar.
On the other end of the spectrum, the Australian Dollar struggled, slipping 0.7%, the weakest performer of the day. The AUD/USD has fallen around 20 pips after today’s interest rate decision saw the Reserve Bank of Australia cut interest rates by 25 basis points to 3.85%.
Japanese yen is leading the pack
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 19-23
All times are in ET
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quothave a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
Leave a Reply