The Canadian dollar popped higher immediately following the release of the U.S. MBA Mortgage Applications report. Applications dropped 4.9% (previously 5.1%). USD/CAD fell from $1.3320 to $1.3284. Traders may have viewed the Mortgage data as evidence of a weaker-than-expected durable goods orders report due later today.
Arguably, the U.S. economic reports are merely a distraction. Strong U.S. employment growth and rising inflation are the key drivers for the Fed’s interest rate outlook. As long as the data as a whole continues to point to an expanding economy, individual data divergences have a short trading life-span.
Canadian dollar traders are eagerly awaiting Bank of Canada Governor Stephen Poloz’s speech in Victoria, B.C. They are hoping that the governor addresses the current trade climate and its impact on domestic interest rates. Weaker-than-expected Consumer Price Index and retail sales data led to some economists downgrading their expectations for an interest rate increase at the July 12 meeting. The tone of Poloz’s remarks will send USD/CAD down to $1.3220 or up to $1.3360.
On Monday, the U.S. administration threatened to place restrictions on Chinese investments which led to a significant drop in U.S. equity markets. Yesterday, they tempered that threat to a far milder version of foreign investment scrutiny. The major Global equity indices managed to stay above water overnight except for China’s Shanghai Shenzhen CSI 300. It dropped 2.03% and is down 5.86% year to date. In contrast, Canada’s TSX index is up 6.54% for the year.
Rising oil prices are cushioning the Canadian dollar fall. The American Petroleum Institute (API) announced at the close of business on Tuesday that U.S. crude inventories dropped 9.228 million barrels in the prior week. WTI oil prices soared, rising from $67.70 U.S./barrel to $71.15/b this morning. Production outages at Canada’s Syncrude refinery, which could last for all of July, plus supply disruptions from Venezuela are added support for crude.
On Tuesday, the U.S. government announced that no country would be exempt from sanctions if they continue to import oil from Iran. The prospect of additional supply disruptions has underpinned crude prices.
The Canadian dollar continues to be vulnerable to broad U.S. dollar sentiment. That sentiment is bullish. The greenback is supported by the outlook for higher U.S. interest rates because American economic growth is robust. The European Central Bank said they would leave interest rates unchanged until the summer of 2019.
Broad-based U.S. dollar demand and heightened fears of a collapse in the North American Free Trade Agreement are keeping the Canadian dollar on the defensive.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
