The Canadian dollar is trading just below the mid-point of Friday’s $1.3255-$1.3396 range in early Toronto markets, this morning. Traders are confused about the direction for the currency in part because the Bank of Canada appears to be confused about monetary policy.
Last October, there wasn’t any doubt about the central bank's hawkish bias, in part because it said so. The BoC upgraded economic outlooks, forecast rising inflation and pointed out that the economy was at or near full capacity. Last week, the Bank of Canada changed direction. It was worried about the impact of falling oil prices on the Canadian economy and concerned that the China/U.S. trade war would cause global growth to slow.
Friday’s Canadian employment report added to the confusion Statistics Canada reported that Canada gained 90,000 new jobs in November, 89,000 of which were full-time. The data does not support claims of a domestic economic slowdown. Traders wondered if the BoC would flip back to hawkish at its January meeting.
The Canadian dollar soared on the back of the surprisingly strong Canadian employment. However, the move got an added lift when the U.S. non-farm payrolls report was weaker than estimated. The combination of strong Canadian data and weak American data fueled demand for Canadian dollars.
Yet, the Canadian outlook isn’t rainbows and unicorns. Canada sparked a diplomatic row with China when it arrested the CFO of Huawei, at the request of the Americans. Her bail hearing is ongoing, and China is threatening Canada with severe consequences if she is not released. The U.S./China trade truce is a work in progress. U.S. Trade Representative Robert Lighthizer said that March 1 is a "hard" deadline for a U.S./China trade deal. China may see this a hostile tactic.
The Canadian dollar is vulnerable to renewed risk aversion selling if Wall Street continues to drop. Asia equity indices and European bourses started the week with losses. US equity futures suggest a "flat" opening today.
The Canadian dollar is also vulnerable to developments in the U.K. and Europe. On Tuesday, the U.K. parliament votes on Prime Minister Theresa May’s Brexit plan. Most analysts believe Ms May will lose the vote although she could always delay it. If the U.K. votes against the plan, it will open up a new can of worms. It could trigger a new referendum, an election or both.
The Canadian dollar is also vulnerable to developments arising from Thursday’s European Central Bank meeting. The European Central Bank is expected to confirm the end of the quantitative easing program and provide some guidance as to the first interest rate hike.
Today’s U.S. and Canadian data will be non-events for currency markets.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
