The Canadian dollar got crushed yesterday. FX traders were very short USD/CAD, expecting a robust Q2 gross domestic product report, positive developments on the U.S./Canada trade talk front and Canadian dollar demand for month-end re-balancing purposes. The GDP report was a tad weaker than forecast, posting a 2.9% gain, q/q rather than the 3.0% that was forecast. It was a relatively minor discrepancy and still above the Bank of Canada forecast of a 2.8% gain, but traders didn’t care. USD/CAD rallied and blew through resistance at $1.2940 and $1.2960, reaching $1.3021 overnight.
The Q2 GDP data significantly reduced the odds that the Bank of Canada would raise interest rates at its monetary policy meeting on September 5, although the majority always expected an October hike, and that hasn’t changed.
Canadian and U.S. trade negotiators are reportedly hard at work trying to hammer out the framework of a trade agreement to meet today’s U.S. deadline. The media is quoting "sources" saying that a deal in principle will be hammered out today with the nitty-gritty details worked out later. If so, the news is not reflected in the current level of the Canadian dollar which is close to its overnight low as of 1050 GMT.
Reportedly the two key issues, dairy supply management and dispute resolution are the sticking points.
The Canadian dollar is also caught up in external developments that have fueled minor risk aversion trading overnight. Yesterday, President Trump repeated that he intends to levy tariffs on $200 billion of Chinese imports as early as next week. The news unsettled global markets.
Asia equity indices closed in the red, and European bourses are in negative territory. Month-end adjustments may have played a role in the selling.
Trump’s comments laid waste to the New Zealand dollar which was under pressure through the overnight session because of its trade relationship with China. Political turmoil in Australia sent AUD/USD tumbling. Malcolm Turnbull, the recently ousted leader of the Liberal party, resigned his seat, leaving the government without a majority.
The fresh China/Trump news also gave the Japanese yen a lift as nervous traders sought safe-haven trades. Month-end portfolio re-balancing may have played a role.
In Europe, EUR/USD was rangebound in a tight band. There wasn’t any shortage of news or data. Euro-zone Consumer Price Index data was weaker than expected which supported ECB President Mario Draghi’s cautious outlook. The euro-zone unemployment rate was unchanged The Turkish government took additional steps to alleviated stress on the currency which resulted in a 2.2% gain.
It is going to be a busy Friday thanks to portfolio re-balancing flows and the release of US Consumer Sentiment and the Chicago Purchasing Managers' Index data. The U.S. equity market performance compared to other global indices indicates portfolio managers will need to sell U.S. dollars, particularly against Sterling, Australia and the Canadian dollar. Monday’s Labour Day holiday will sharply reduce trading activity after lunch today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
