It is said that a "rising tide lifts all boats." Similarly, a "sinking U.S. dollar lifts currencies." The Canadian dollar experienced this phenomenon overnight when the U.S. dollar was sold against all the major G-10 currencies. The selloff reversed the greenback’s month-end gains which were due, in part, to fund managers buying dollars to rebalance their portfolios.
Chinese authorities had a hand in turning risk sentiment to positive from negative as well. The October Caixin Manufacturing Purchasing Managers Index (PMI) was just 50.1. A PMI result below 50 indicates an economy that is contracting. Chinese officials are well aware of that signal, and they announced new measures to support the economy. They said they would "unswervingly support" the economy and put a priority on infrastructure spending. That news underpinned Asian equity indices and turned risk sentiment positive. The Canadian dollar benefited from the improved tone.
The Canadian dollar declined yesterday despite a better than expected August Gross Domestic Product report. August GDP rose 0.1%, beating the forecast of 0.0% but below the July 0.2% result. The report may have surpassed the estimates but it did not suggest that the Canadian economy was booming. The growth was concentrated in just a few areas: financial services and energy. In all, 12 of the 20 sub-sectors declined in August. Nevertheless, the 0.1% gain keeps the annual growth forecast of 2.0%, intact. Not stellar, but enough to keep the Bank of Canada’s finger on the interest rate hike trigger.
The Canadian dollar may struggle to extend its overnight gains, at least for the short term due to the steep plunge in oil prices over the past few days. West Texas Intermediate (WTI) plunged from $66.95 U.S./barrel on Wednesday to a low of $64.68 in Europe this morning. Traders are more concerned about the risk of rising crude inventories and slowing global growth than possible oil shortages from the US sanctions on Iran. Yesterday, the Energy Information Administration (EIA) said that US crude inventories rose by 3.22 million barrels last week which accelerated the price decline.
The Canadian dollar continues to be vulnerable to European and U.K. developments. The British pound climbed sharply overnight on reports that an E.U./Brexit deal could be completed by November 21. The rally received additional encouragement on rumours that Prime Minister Theresa May had secured an agreement to allow financial services firms in the U.K. to continue to deal in the E.U., post-Brexit. The sterling rally led to GBP/CAD demand as well.
FX markets will be carefully watching the Bank of England policy meeting results today in addition to U.S. economic reports which include: Institute for Supply Management Manufacturing Purchasing Managers' Index, Jobless Claims and Construction spending. Wall Street price action will be another currency driver.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
