The Canadian dollar is trading with a firmer tone today. Bank of Canada Governor Stephen Poloz’s speech in Victoria, B.C. yesterday did not offer anything new for traders. The governor reiterated the Canadian economy was close to capacity and left the door ajar to a July rate hike. Some economists and analysts believed the statement and press conference were slightly dovish. However, FX traders didn’t see it that way. USD/CAD declined from a post speech peak of $1.3385 to $1.3274 in early Toronto trading today. Poloz said that rates hikes are data-dependent.
The Canadian dollar is also being supported (marginally) by soaring crude oil prices. On Wednesday, the U.S. Energy Information Administration said that crude oil inventories declined by 9.89 million barrels in the previous week. The supply drawdown comes at a time when the U.S. is threatening sanctions on any country that imports Iranian oil after November 2018.
The Canadian dollar remains depressed due to different outlooks for U.S. and Canadian interest rates. The U.S. economy is booming while Canadian economic growth is on the sluggish side. Canadian dollar sentiment is negative because of threats to the North American Free Trade Agreement, new tariffs on U.S. imports of Canadian steel, aluminum and softwood lumber. The specter of a 25% tariff on all cars imported into the U.S. is hugely negative as it would decimate Ontario’s economy.
The FX market is expecting the BoC to raise rates in July and if a hike occurs, Poloz may highlight ongoing risks to the economy. If so, it would short-circuit any gains in the currency.
The escalating U.S./China trade dispute will help limit near-term Canadian dollar gains. Wall Street has viewed President Trump’s actions in a negative light. The Dow Jones Industrial Average is down 2.57% for June, and the S&P 500 has lost 0.8%. If equity indices start retreating rapidly, FX traders tend to seek safe-haven trades. The Canadian dollar is usually sold in that environment.
Global trade disruption is a common theme among the G-7 central banks. The Reserve Bank of New Zealand left interest rates unchanged. They noted in their policy statement that their global growth outlook had been tempered slightly due to trade tensions. Bank of England Governor Mark Carney warned that the U.K. economy is exposed to a "hard" Brexit.
Euro-zone political developments are another source of woe for FX markets, and they could prompt a rush to risk aversion trades. Germany’s governing coalition is on shaky ground, and the new Italian government is not viewed as euro-friendly.
Canadian dollar gains may be limited today due to the risk that a drop in equity prices would lead to Canadian dollar selling for month-end portfolio re-balancing reasons.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
