The Canadian dollar soared following the more-dovish-than-expected U.S. Federal Open Market Committee (FOMC) policy meeting yesterday.
The FOMC didn’t surprise anyone when it left U.S. interest rates unchanged at 2 ¼ - 2 ½ %. The surprise was that it forecast no rate hikes for 2019. The December "dot-plot" estimates predicted two rate hikes for this year. After a series of dovish speeches by Fed Chair Jerome Powell and the January 30 FOMC statement, analysts and economists were predicting that rate hike projections would be reduced from two to one.
In addition, Powell didn’t come across as decisive but rather unsure. He said that the economic data wasn’t providing any signals that would suggest a rate move in either direction, up or down. Instead, it showed a need for patience. He said that the outlook was favourable and predicted economic growth of 2% with inflation hovering around its target level.
Initially, FX traders were not impressed. They sold U.S. dollars across the board, and they sold aggressively. EUR/USD soared from $1.1346 to $1.1446 immediately following the statement and USD/JPY plunged to 110.54 from 111.50. USD/CAD dropped to $1.3258 after touching $1.3342 mid-morning.
However, the euphoria following the FOMC faded in Asia and European trading. The U.S. recouped a sizable portion of its losses compared to its closing level as traders re-evaluated their U.S. dollar outlook. The greenback is still the best of a bad lot as the American economy continues to outperform the European, British, Canadian and Japanese economies.
Canadian dollar selling was evident in Asia and Europe, and it continued in early Toronto trading. Traders ignored a steep spike in oil prices.
West Texas Intermediate soared from $58.35 to $60.30 U.S./barrel yesterday due to a combination of a weak U.S. dollar and a steep drop in weekly crude inventories. The Energy Information Administration (EIA) said that weekly crude stocks fell 9.5 million barrels. Sanctions against Venezuela and Iran, the extension of production cuts by the Organization of the Petroleum Exporting Countries and fears that demand will outstrip supply in the second half of the year fueled the rally. Prices retreated from their peak which undermined the Canadian dollar in the process.
The Canadian dollar is exposed to risk aversion selling which could become more prominent in the coming days. U.K. Prime Minister Theresa May’s request for a three-month extension to Article 50 may be denied by the European Union, according to rumours. The E.U. is only willing to delay until May 22 because of the European Union member elections that take place the next day.
Today's U.S. data is only second-tier, whereas Canadian data focuses on employment insurance and wholesale trade.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
