The Canadian dollar is caught between a rock and a hard place. The rock is widespread U.S. dollar demand against the major G-10 currencies, and the hard place is falling oil prices. West Texas Intermediate oil prices have dropped 11% in November, and the short-term technical outlook is bearish, targeting further losses to $55.30/b. Earlier this morning, the Organization of the Petroleum Exporting Countries (OPEC) warned of the possibility of a 2019 oil glut emerging. They blame a slowing global economy and rising supply from non-OPEC producers.
Last week, the Energy Information Administration (EIA) reported that the U.S. produced a record 11.3 million barrels per day of oil in October at the same time as they said U.S. crude inventories continued to rise. OPEC is reportedly discussing fresh productions cuts to help shore up prices. However, that strategy risks incurring the wrath of President Trump. Yesterday, he tweeted "Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!" The drop in crude prices has undermined the Canadian dollar.
The loonie is also under pressure from European political developments. EUR/USD plunged yesterday, falling from Friday’s closing level of $1.1335 to $1.1218 overnight.
EUR/USD weakness is due to fears that the European Union and Italy’s budget dispute will lead to contagion risks from other nations, particularly Spain and Portugal. Italy recently elected another government, which is a centre-right coalition led by Prime Minister Giuseppe Conte. The E.U. rejected Italy’s 2019 budget plan which forecasts a 2.4% deficit to Gross Domestic Product. Italy was told to redo it, and the Italians said "No." Spain and Portugal have similar issues to Italy, and those governments are looking for ways to jump-start their economies.
If Italy’s spending plans get the nod from the E.U., it would expect similar treatment. The Italy/E.U. budget impasse is not the only negative weighing on the single currency. The European Central Bank (ECB) said monetary policy rates are not changing until the summer of 2019 at the earliest. Across the Atlantic, the U.S. Federal Reserve is hiking rates. The next increase is expected in December, with four more predicted in 2019. The widening interest rate differential is boosting U.S. dollar demand, and the Canadian dollar is collateral damage.
U.K. politics and the Brexit negotiations are providing another source of market uncertainty leading to U.S. dollar demand, and the Canadian dollar gets caught in the crossfire. A series of headlines yesterday and on the weekend suggested that U.K. Prime Minister May had lost the support of her party due to her Brexit plans. Cabinet ministers have resigned their posts, and there are rumours of a non-confidence vote. Meanwhile, the Brexit headlines have been somewhat positive suggesting that a deal is imminent. GBP/USD has sunk and soared on the various reports.
Wall Street dropped again on Monday, in part because of the widespread risk aversion which led to Canadian dollar selling. There isn’t any Canadian data of note this week, leaving the currency to track broad U.S. dollar moves.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
