The Canadian dollar is the worst performing G-10 major currency in overnight trading. It was the only currency to weaken against the U.S. dollar even as the other commodity currencies (AUD/USD and NZD/USD) rallied.
The small underperformance by the Canadian dollar is due in part to the slide in oil prices in the past week. West Texas Intermediate (WTI) dropped from $75.05/barrel on October 10 to $68.95/b today. The 8.12% decline is due to a combination of events. The U.S. and Saudi Arabia have dialed back their hostile rhetoric and threats following the disappearance of a journalist, last seen in the Saudi embassy in Ankara, Turkey. The Saudis have admitted that the man died and are launching an investigation. President Trump is satisfied with the explanation, eliminating concerns that the Saudis would use oil to combat any U.S. sanctions. Another reason for the decline was the steep increase in U.S. crude inventories last week. The Energy Information Administration (EIA) said yesterday that U.S. oil stocks rose 6.490 million barrels.
The Federal Open Market Committee minutes from the September 26 meeting were released yesterday afternoon. Markets were expecting a hawkish tone, and they were not disappointed. The minutes reconfirmed that the Fed was on a gradual rate hiking path which implies a 0.25% increase every quarter. More hawkishly, the minutes hinted that interest rates could exceed the so-called "neutral rate," implying more increases than previously expected.
The minutes said, "A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2% inflation objective or the risk posed by significant financial imbalances."
Traders bought dollars on the news which continued during the Asia session. The risk of higher-than-expected U.S. rates put downward pressure on Asia equity indices as well. That sentiment didn’t carry forward into the European session. The U.S. dollar gains were reversed as the focus shifted from America to Europe, although the Canadian dollar wasn’t impacted.
The Australian and New Zealand dollars got support after the U.S. Treasury declared that China was not manipulating the Yuan, with AUD/USD getting an added boost from a 12-year low unemployment rate. The Canadian dollar did not participate. On Wednesday, Statistics Canada announced that August manufacturing shipments dropped 0.4%, down from a gain of 1.2% in July. The headline was far worse than the details. The drop was largely due to an 8.3% drop in auto sales, which is typical near the end of the model year. If this category was excluded, manufacturing shipments would be up 0.4% in August.
Nevertheless, the weak data gave rise to concerns that the Bank of Canada may be slower to pull the trigger on additional rate hikes after the expected October 25 hike.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
