The Canadian dollar drifted higher inside a narrow trading band overnight. FX traders adjusted positions ahead of this afternoon’s U.S. Federal Open Market Committee (FOMC) meeting. This meeting does not include a press conference or any new economic forecasts. Most analysts believe today’s result will be a "non-event," on the assumption that the Committee would wait for a meeting with a press conference to explain a policy shift. The Fed is expected to raise rates at the December 18 meeting.
The Bank of Canada (BoC) is also expected to raise rates in December. BoC Governor Stephen Poloz said that Canadian interest rates would be rising to the neutral level, which implies the need for about four more rate increases. He said that the Governing Council is "data dependent" and the recent Canadian data has been strong. Yesterday, the Ivey Purchasing Managers Index surged to 60.1 in October, well above September’s 50.4 level. The gain may have been partly due to optimism following the United States Mexico Canada Agreement (USMCA) on trade.
Canadian dollar gains are being stymied by soft oil prices. West Texas Intermediate oil has fallen from $72.20/U.S./barrel to $61.17/barrel in just three weeks. The drop is more impressive considering that the U.S. imposed sanctions on Iran oil and threatened penalties against any country or company that trades with the regime. The U.S. gave waivers to eight countries which included China, India and South Korea, three of Iran’s biggest customers. Oil prices are further undermined by rising US crude inventories. The Energy Information Administration reported yesterday that U.S. crude inventories rose 5.78 million barrels in the week ending November 2. Exacerbating the oversupply concerns was another report claiming the U.S. pumped a record 11.6 million barrels per day in October.
The Canadian dollar is being undermined by ongoing risk aversion sentiment stemming from euro-zone politics, U.K. Brexit and the U.S./China trade dispute. A Chinese official suggested that President Trump and President Xi Jinping’s meeting at the G-20 meeting could be of "great significance" suggesting they hope to reboot trade talks. President Trump is all for restarting the discussions as long as China makes concessions.
The European Union and Italy are at an impasse. Italy Prime Minister Conte told the E.U. he did not have to make concessions. European Union Economic Commissioner Pierre Moscovici threatened to levy sanctions if the E.U. and Italy did not reach an agreement. If Italy prevails, other E.U. nations may follow Italy’s lead, threatening the E.U. which would trigger broad U.S. dollar demand. The Canadian dollar would suffer.
Today’s U.S. and Canadian economic data will take a back seat to this afternoon's FOMC statement.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
