The Canadian dollar was side-swiped yesterday, and it has yet to recover, and it was due to circumstances beyond its control. Wall Street melted down, and the ensuing risk aversion panic fueled USD/CAD demand. Prices climbed from $1.2927 in early Europe trading on Wednesday to a peak of $1.3062 overnight.
The Wall Street retreat was triggered by the earlier spike in U.S. Treasury yields. Suddenly, equity traders took note of rising U.S. interest rates and a hawkish sounding Federal Reserve and decided to book some profits. The selling pressure intensified with every point lower as traders scrambled to protect gains. The jury is still out as to whether the stock market plunge was just an overdue correction in a market that had risen steadily since June or a sign of things to come. At the moment, U.S. equity futures point to a continuation of the selling today.
President Trump blamed a hawkish Fed for the equity market rout say "the Fed has gone crazy." However, the economic data suggests otherwise. The U.S. economy is booming. Unemployment is at 48-year lows, and inflation is only rising slowly. U.S. Consumer Price Index is due later today, and Core CPI is expected to rise to 2.3% in September, up from the August reading of 2.2%. That number is fully priced into FX markets.
Yesterday’s Wall Street rout spread throughout Asia and Europe. China’s Shanghai Shenzhen CSI 300 index was especially hurt, losing 4.80%. The move didn’t translate into U.S. dollar demand though. The greenback retreated (modestly) across the board on speculation that equity market weakness could cause the Fed to slow the pace of rate increases.
The recent rally in oil prices didn’t provide the Canadian dollar much in the way support. However, the drop from $75.10/barrel yesterday to $71.69/b today may have contributed to the selling pressure due to widespread risk aversion.
Canadian dollar losses are likely to be contained due to increased expectations for a hawkish Bank of Canada outlook. The BoC policy meeting is set for October 25. The bank is universally expected to raise interest rates by 0.25% to 1.75%. Bank of Canada Governor Stephen Poloz admitted that the negotiations for the North American Free Trade Agreement clouded the Governing Councils economic outlook. Now that the United States Mexico Canada Agreement (USMCA) is a reality, the clouds have parted. The Canadian and U.S. economies are intertwined. Canada benefits from strong U.S. growth, and that is still the case. Governor Poloz is on record for saying that the BoC is "data dependent" and the recent data supports not just one rate hike but, according to many economists, three more increases in 2019 with the first one being in January.
Canadian dollar traders will continue to be guided by broad U.S. dollar moves today. There isn’t any domestic data of note.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
