The Canadian dollar is sidelined with traders patiently awaiting the results of today’s U.S. mid-term elections. The rest of the G-10 major currencies are doing the same thing, except the British pound. GBP/USD is on fire thanks to positive Brexit headlines which have boosted prices to $1.3088 in early Toronto trading. The latest rally was triggered when the UK Brexit negotiator Dominic Raab gave a “thumbs-up” sign when he left a Cabinet meeting. That move contributed to a minor pop in USD/CAD because of GBP/CAD demand.
The U.S. and China trade dispute showed signs of a thaw overnight. China Vice President Wang Qishan told an audience in Singapore that China was ready to renew trade talks. He spoke of cooperation and a healthy relationship between the two nations. FX markets were more focused on the U.S. election than the ongoing trade dispute.
The U.S. election matters to markets. Republican control of the House of Representatives and the Senate have been good for the U.S. dollar, and stock market-friendly environment thanks to tax cuts. Democrats may gain control of the House if they manage to win an additional 24 seats. The latest polls suggest that they will. If by defying all odds, the Democrats win majorities in the Senate and the House, the U.S. dollar would sink, lifting the Canadian dollar. If the Democrats only manage a majority in the House, it would mean two more years of acrimonious U.S. politics, without getting much accomplished. A Republican win in the House and Senate would trigger a U.S. dollar rally and embolden President Trump.
For the most part, the U.S. election is mostly a noisy distraction for FX markets, filling a void from an empty economic calendar. There isn’t any top-tier U.S. data on this week, and Thursday’s Federal Open Market Committee meeting is expected to be a "non-event" for markets. The Fed is universally expected to leave interest rates and policy unchanged. There aren’t any updated economic projections or a press conference. Next week heralds the return of key economic reports. The Consumer Price index is to be released on Wednesday followed by Retail Sales on Thursday. The Canadian dollar is vulnerable to stronger than expected results especially since the Canadian economic calendar is empty.
Yesterday, Bank of Canada Governor Stephen Poloz repeated that Canadian interest rates would have to rise in order to return to "Neutral." He said the same thing in his Monetary Policy Report press conference and at his testimony before Canadian parliamentary officials. Nevertheless, the prospect of higher domestic interest rates has helped to limit Canadian dollar weakness in the short term.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
