The Canadian dollar is perky, compared to its commodity currency counterparts. It is heading into the Thanksgiving weekend having made substantial gains against the Australian and New Zealand dollars. Often, this trio of currencies trades in tandem with each other due to the similarities of their economies, particularly the Australian dollar. Australia and Canada are resource-based economies, each dependent on a much larger nation to fuel exports. For Canada, it is the U.S. while Australia is beholden to China.
The Canadian dollar has risen 8.26% against the Australian dollar since June. The successful renegotiation of the North American Free Trade Agreement (now called USMCA) gave the Canadian dollar a boost while the anti-China/ trade war rhetoric from the U.S. has undermined the Australian currency. The other major reason for the Canadian dollar’s outperformance is the vastly different monetary policies between the Bank of Canada (BoC) and the Reserve Bank of Australia. (RBA) The BoC is widely expected to raise domestic rates on October 25, January 17 and three more times after that. In contrast, the RBA is not expected to move rates, up or down, until 2020.
The Canadian dollar rally following the announcement of the United States Mexico Canada Agreement on trade has faded completely. USD/CAD gapped lower after the deal was announced. Prices dropped from the September 28 close of $1.2908 to a post-trade deal low of $1.2784 on October 1. Those gains have been completely reversed, and the Canadian dollar opened today, weaker than where it started the week.
Canadian dollar traders have shifted their focus from the now completed U.S./Canada trade talks to domestic and U.S. economic data due today. The U.S. and Canadian employment reports are on tap. Non-farm payrolls are forecast to show an increase of 185,000 jobs, slightly below the 201,000 recorded in August. The shortfall will be blamed on Hurricane Florence. Earlier this week, an above-consensus gain in ADP Payrolls and a rise in the employment cost index of the Institute for Supply Management report suggested to economists that this morning's NFP report would surprise to the upside. Short-term traders have positioned themselves for such a result and bought U.S. dollars, which helps to explain the weaker Canadian dollar profile. Arguably, the U.S. data should be strong as indicated by the rash of better than expected economic reports for the past month.
The Canadian numbers are a different story. The consensus forecast is for a gain of 25,000 jobs, but the data is notoriously volatile. A gain of 25,000 jobs or higher would be bullish for the Canadian dollar. It would provide the BoC with more ammunition to increase the pace of domestic rate hikes. Weaker than expected data may be less damaging to the currency due to the improved domestic economic outlook from the USMCA.
It is Thanksgiving weekend in Canada. Domestic markets (bonds) will close early. The Canadian dollar may benefit from holiday weekend profit taking demand as positions get trimmed.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
