The Canadian dollar drifted lower in overnight markets thanks to a rise in risk aversion trades. The currency has enjoyed a bout of popularity since last week’s forecast-beating May gross domestic product data. The 0.5% rise gave the Bank of Canada (BoC) all the ammunition it needs to increase interest rates at its September meeting. To many, it also set the table for another hike before year-end. However Canadian dollar gains stalled around the 77.00-cent level against its American cousin.
The U.S. Fed didn’t help. Yesterday, the Federal Open Market Committee (FOMC) left U.S. interest rates unchanged but upgraded their outlook. The statement was slightly more hawkish than what many traders expected which precipitated widespread U.S. dollar buying, and the Canadian dollar was collateral damage. In reality, the Fed wasn’t as hawkish as the FX moves implied. They merely reaffirmed that U.S. economic growth was rising at a strong rate and inflation was near 2%.
FX traders are concerned that North American Free Trade Agreement negotiations will hamper the BoC’s ability to adjust monetary policy, despite Governor Poloz’s assertions to the contrary. Bloomberg news reported that Mexico and the U.S. were on the cusp on an auto content agreement. Canada was excluded from those meetings, despite asking to take part. President Trump said he prefers bilateral agreements.
Prime Minister Trudeau embarrassed the President after the G-7 meeting in June and Canadians may be paying the price. Reportedly, it is easier for the White House to get a bilateral deal approved before the mid-term elections than it would be for the new NAFTA agreement.
Canadian dollar traders and the rest of the FX market are keeping a close watch on today’s Bank of England (BoE) meeting. The BoE raised its repo rate by 0.25% to 0.75% as was widely expected. Still, enough traders were surprised that GBP/USD popped to $1.3125 from $1.3070. The Canadian dollar did not budge.
Oil prices movements have not had much of a direct impact on Canadian dollar price movements in the past few months. WTI oil prices have dropped from $74.15/barrel on July 11 to $66.98/barrel this morning. The perception of Canada as a petrol-currency still lingers, and so the drop acts as a drag on Canadian dollar gains.
On Friday, Canadian trade data will be released, but it will be overshadowed by the U.S. employment report. Non-farm payrolls (NFP) are expected to rise 190,000 while average hourly earnings will increase 0.1% to 0.3% in July. Although robust data is expected, the U.S. dollar will still rally, especially if it surprises to the upside.
There are no Canadian economic reports today. The ongoing China/U.S. trade tensions and the hawkish tweak to the FOMC statement suggests a quiet trading session with the greenback well supported.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
