The Canadian dollar rallied alongside the rest of the major G-10 currencies overnight after the results of the U.S. mid-term elections were known. The Democrats managed to win enough seats to have a majority in the House of Representatives, but not nearly as many as predicted. Nevertheless, by having a majority, they will be able to hamper some of President Trump's agenda. They could initiate impeachment proceedings, and increase investigation into Trump’s family’s businesses and presidential campaign. They could use the threat of such initiatives to extract concessions on health care and immigration from the president. The Republicans improved their Senate majority which eased the sting from losing the House majority.
FX markets viewed the Democrat win as negative for the U.S. dollar. The Democrats could try to roll back Trump’s tax cuts. They are not seen as "business-friendly", and they could derail the U.S. economic expansion.
The broad U.S. dollar selloff was not entirely because of U.S. politics. The greenback enjoyed strong gains against all the majors since April, and it was overdue for a correction. The British pound rallied for the past week because of Brexit developments which triggered a short squeeze in GBP/USD. EUR/USD rallied, in part because the European Central Bank will be shifting to a tightening mode in the coming months.
The Federal Open Market Committee two-day meeting begins today with the policy statement being released on Thursday at 2:00 p.m. EST. The Committee raised the Federal Funds target rate by 0.25% to 2.0%. That move was universally expected. At the time, they said "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
Since then, U.S. economic reports have been mixed to strong. Last Friday’s Employment report was better than expected. However, the last inflation report was disappointing. Together, it is enough to expect that the FOMC will leave policy unchanged tomorrow. However, they are supposed to raise rates in December which will keep FX markets focused on US and G10 interest rate differentials.
The Canadian dollar is undermined by soft oil prices. West Texas Intermediate (WTI) has dropped 15.5% in the past month, despite the U.S. imposing sanctions on Iran. The Americans are threatening severe penalties to any nation or company that does business with Iran, including importing oil. They have given waivers to eight countries, including China and India, two of Iran’s largest customers. The waivers mean that the impact of the sanctions on the global oil supply will be minimal. In addition, U.S. crude inventories continue to build while the China/U.S. trade dispute threatens global demand.
The prospect of weak crude prices and higher US interest rates is weighing on the Canadian dollar.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
