The Canadian dollar is riding a rollercoaster. It started Friday when Canadian economic data reports failed to live up to expectations. Retail Sales and Consumer Price Index were below forecasts, and the Canadian dollar was knocked for a loop. USD/CAD soared, rising from $1.3020 to $1.3130 immediately after the data release and it spent the rest of Friday and the overnight session consolidating that move, inside a $1.3080-$1.3115 range.
The weaker than expected Canadian data made traders nervous. Expectations were riding high for a hawkish Bank of Canada policy statement and upgraded Monetary Policy Report forecasts, which are due on Wednesday. Those expectations suffered. Traders were re-evaluating the degree of hawkishness that the BoC would display in light of the soft economic reports, concluded not as much, and sold Canadian dollars.
The may be misguided. Bank of Canada Governor Stephen Poloz and other BoC officials often dismiss disappointing, or better-than-expected data, because there could be many variables that caused the result. They prefer to look a data series to get a better idea of trends.
Friday’s Canadian data reports were from August for Retail Sales. That is a significant vacation period suggesting that Canadians were holidaying and not shopping. Inflation is still above the bottom of the BoC’s target level. More importantly, the United States Mexico Canada Agreement (USMCA) had not be finalized. The new trade agreement could give the BoC enough ammunition to upwardly adjust its forecasts which would support the Canadian dollar.
China played a role in Canadian dollar movements overnight. President Xi Jinping added his voice to the many officials providing verbal stimulus to the Chinese economy. His stimulus wasn’t just verbal; he promised tax cuts and "unwavering" support for the domestic economy. Chinese equity markets soared led by a 4.3% gain in the Shanghai Shenzhen 300 index. Traders also took note in the dip in the official fixing rate for USD/CNY. The Chinese developments underpinned the commodity bloc currencies due to expectations of increased imports of raw materials.
UK and Italy issues were front-and-centre during the European session. Moody’s cut Italy’s bond rating to Baaa3 which many analysts described as mild and supportive for EUR/USD. Initial support for EUR/USD faded as markets shifted their focus to U.S. interest rates. The U.S. 10-year Treasury yield jumped to 3.207% from 3.184% which knocked EUR/JPY from its perch.
Sterling was under pressure from the European open. A series of negative Brexit headlines and talk that UK Prime Minister Theresa May could lose her job in a "non-Confidence" vote undermined GBP/USD.
There isn’t any U.S. or economic reports of note due today leaving FX market direction at the mercy of headlines and equity price movements.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
