The Canadian dollar is at the mercy of external developments and, for the moment, they favour the currency. Three key global themes are taking turns driving broad U.S. dollar moves. They are Brexit and Eurozone dynamics, China/U.S. trade negotiations, and the U.S. Federal Reserve.
The Brexit drama comes to a head on Saturday. U.K. Members of Parliament will vote on Prime Minister Boris Johnson’s Brexit deal, and analysts say odds for success or failure are 50/50. If Johnson prevails, GBP/USD will rally toward $1.3300. In turn, it may spark broad U.S. dollar selling due to improved risk sentiment. The Canadian dollar would trade firmer as a result. A rejection of the Brexit plan GBP/USD would weaken GBP/USD and the so-called "riskier currencies," which includes the loonie.
Brexit is not just a U.K. issue. The European Central Bank (ECB) blames a lot of eurozone growth problems on the uncertainty that Brexit created. The lack of a deal would continue to impact growth and ensure the ECB maintains its dovish outlook.
FX markets saw a flurry of positive risk sentiment at the beginning of the week, following news that China and the U.S. had a partial trade deal. That sentiment faded due to the lack of details. President Trump tweeted that China would buy $40-50 billion of U.S. agricultural products.
However, Chinese authorities did not confirm the amount. China’s Ministry of Commerce spokesman Gao Feng said that the U.S. needed to remove tariffs to achieve an agreement. That doesn’t seem likely, suggesting the talks will drag on well into 2020. The Canadian dollar tends to rise or fall on the prevailing trade deal sentiment.
Another market-moving factor is the Federal Reserve's monetary policy outlook. Fed Chair Jerome Powell appears unable to discern any clarity to the longer-term outlook. The lack of clarity, contradicting economic data, and anti-Fed interest rate policy tweets by Trump have fueled FX volatility.
FX markets are ending a busy week on a subdued note. AUD/USD and NZD/USD traded with a modestly firming bias overnight despite weaker than expected China Q3 gross domestic product data. Q3 GDP rose 6.0% rather than the 6.1% that was forecast. Prices were underpinned by broad U.S. dollar weakness.
The Canadian dollar will continue to track broad U.S. dollar moves. Nevertheless, prices are unlikely to break out of the $1.3120-1.3180 trading range as there isn’t any top-tier Canadian or U.S. economic data available today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
