The Canadian dollar rejected the USD/CAD move below $1.3000 yesterday and subsequently sank. The currency weakness is occurring even though recent domestic economic reports have been robust and oil prices have stayed firm. The Bank of Canada is on track to raise interest rates in September or October which, if it occurs, would nullify the impact of the expected US Fed rate increase, which most expect will happen on September 26.
The Canadian dollar weakness is happening even as the U.S. dollar slides against the major G-10 currency pairs. Since the New York close on Friday, August 17, the US dollar has declined against all the G-10 majors except the Japanese yen, Australian dollar and Canadian dollar.
USD/JPY rallied because of the perception that China/US trade tensions eased, due to the trade talks in Washington that ended yesterday.
USD/JPY also rallied because of the modestly hawkish U.S. Federal Open Market Committee minutes, released on Wednesday afternoon. The prospect of rising U.S. rates while the Bank of Japan sticks to its ultra-easy monetary policy undermines the yen.
The Australian dollar plunged due to a political crisis. Prime Minister Malcolm Turnbull was ousted as leader of the Liberal party and replaced by Scott Morrison. FX traders detest uncertainty and AUD/USD was sold when the political strive came to light. AUD/USD recovered, somewhat, in overnight action.
The Canadian dollar’s fate is tied to the ongoing North American Free Trade Agreement renegotiation. The U.S. and Mexico are hard at work hammering a solution towards a new agreement. A deal is expected to be reached sometime next week. Canada has been excluded from the latest round of talks that have been going on since the beginning of August. The Canadian government says that they are happy with the negotiations to date. Maybe so, but they have are already trying to spin a failure as defending Canada’s rights. Prime Minister Trudeau said yesterday, according to Global News, "he would only sign a deal good for Canadians that works for the middle class."
The fear that Canada fails to renegotiate a NAFTA deal has capped Canadian dollar gains and overshadowed the risk of higher domestic rates. That’s because a NAFTA collapse would damage the Canadian economy and preclude rate increases.
The annual Jackson Hole Symposium for central bankers is in full swing today. FX traders are patiently waiting for Fed Chair Jerome Powell’s speech scheduled for 10:00 am EDT, today. It is not likely to have much of an impact. The chairman is expected to reiterate that the Fed is independent, a view reinforced earlier this week when the Washington Post reported that Powell had not spoken to President Trump about interest rates. This year's symposium lacks the star power of previous meetings. European Central Bank President Mario Draghi, Bank of England Governor Mark Carney and Bank of Japan Governor Haruhiko Kuroda are not attending.
U.S. Durable Goods Orders data is the only major U.S. economic report today. The headline number (forecast -0.5%) is expected to be soft due to a drop in aircraft orders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
