The Canadian dollar is adrift in the Sea of Consolidation. The positive impact from the twin announcements of a new trade deal and Shell’s $40-billion Liquid Natural Gas Project are rapidly fading. Traders are shifting their focus to macroeconomics and geopolitics. The Canadian dollar spent the overnight session see-sawing inside a narrow trading band. USD/CAD is well support in the $1.2770-90 area but sees plenty of resistance in the $1.2880-1.2905 zone.
Italian politics is the key driver of FX volatility today and this week. The new Italian Coalition Government proposed new spending measures that pushed the budget deficit to 2.4% of Gross Domestic Product, much to the consternation of the European Union. E.U. officials are outraged that the 2.4% deficit spending is well above the previous governments 1.7% level, claiming it is a serious deviation from commitments. The French economic minister said that Italy must respect the E.U.’s spending rules.
EUR/USD, which had been under pressure all week because of the Italian budget, bounced overnight after a report suggested that Italy would cut their spending plans from 2.4% to 2.0%. Those gains were reversed when the Italian Deputy Prime Minister Luigi Di Maio denied such a move. The ebb and flow of EUR/USD led to the Canadian dollar bouncing in a tight range.
Canadian dollar traders were keeping a wary eye on United Kingdom political developments. Prime Minister Theresa May’s Conservative Party’s conference is ending four days of meetings with a speech by May. Sterling has seen a bit of support because fears of a leadership challenge have faded away. U.S. dollar selling against the British pound and euro often provides the Canadian dollar with a bit of a lift, as was the case overnight.
The Canadian dollar is rangebound, like the rest of the G-10 currency majors due to the upcoming U.S. employment report on Friday. Significant deviations between the result and the forecast trigger sharp price swings in the U.S. dollar. Such being the case, FX traders tend to limit trading activity a few days before the data is released. The narrow overnight ranges are evidence of that phenomenon. Arguably, the U.S. result will be quickly forgotten as it is unlikely to dissuade the Federal Open Market Committee from its chosen path.
Fed Chair Jerome Powell delivered an upbeat outlook for the U.S. economy yesterday, characterizing by saying: "it looks very good." He was pleased that economists from the Fed and professional forecasters predicted "the unemployment rate remaining below 4% through the end of 2020, with inflation staying very near 2% over the same period." Expectations that the Fed could hike interest rates higher and faster than previously thought were reinforced when Powell said, about monetary policy "our course is clear: Resolutely conduct policy consistent with the FOMC's symmetric 2% inflation objective, and stand ready to act with authority if expectations drift materially up or down."
Firm oil prices added another layer of support to the Canadian dollar.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
