The Canadian dollar consolidation is continuing this morning. Prices have bounced off support levels stemming from a series of tops and bottoms since October 8 and an uptrend line from the beginning of October. Prices are supported by expectations of a hawkish Bank of Canada (BoC) policy meeting statement and upgraded forecasts from the Monetary Policy Review. (MPR) The new U.S. Mexico Canada Agreement (USMCA) on trade has de-fogged the BoC economic forecasting crystal ball. A 0.25% rate hike on October 25 is fully priced into markets. However, there is still plenty of room for Canadian dollar gains in the event the BoC suggests that a rate hike in December or January is possible.
Traders may get some insight into the BoC Governing council’s thinking this morning with the BoC Business Outlook Survey. The survey is expected to complement the previous report showing higher inflation expectations with tighter labour and capacity conditions. A more positive than expected report will lead to fresh Canadian dollar demand.
On the other hand, Canadian dollar demand may be derailed by rising geopolitical tensions. Saudi Arabia faces the wrath of Trump because of suspicions that they were involved in the disappearance of a Washington Post journalist. The president is warning of "severe punishment" and sanctions. The Kingdom said it would respond aggressively to any US actions. That response could be a reduction in oil exports. The US sanctions on Iran mean a loss of 3.5 million barrels/day of crude, which is why WTI has rallied too strongly in the past few months. If the Saudis decided to cut their production, prices would soar, and the U.S. economy would suffer, at least in the short term.
Another area of unease is the ongoing U.S./China trade war. President Trump rekindled the flames on the weekend during a "60 Minutes" interview. In terms of trade, he told the interviewer that "China does $100 and the U.S. does $500 billion with China."
He injected the European Union into the mix. He complained that the E.U. was formed to take advantage of America on trade, suggesting the way the E.U. treats America is hostile.
FX markets didn’t react too much to Trump’s ramblings, but they were concerned about euro-zone developments. An European Central Bank official reminded markets that domestic interest rates would be moving higher with the timing of the moves to be clarified in the summer of 2019. Other officials suggest clarification will be much earlier.
The U.K./E.U. Brexit talks are another area of uncertainty for FX markets. Hopes that a deal would have been announced on the weekend were dashed because they haven’t been able to determine a solution to the Irish border question
U.S. Retail Sales rose 0.1%, unchanged from August and below forecasts. FX markets have ignored the data.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
