The Canadian dollar is sinking. The S.S. Loonie has sprung leaks from port, stern and leeward sides. The domestic currency is being battered by a number of geopolitical issues, weak oil prices and by a dovish shift by the Bank of Canada.
This week’s downward spiral in the value of the Canadian dollar compared to the U.S. dollar occurred despite a record Canadian employment report. The gain of 94,100 jobs was the best since 1974, helped by a surge in employment in the Cannabis industry. Even energy challenged Alberta saw a gain of over 20,000 jobs. Alas, the Canadian dollar rally was short-lived, a victim of rising geopolitical tensions.
The ongoing China/U.S. trade negotiations are the major source of G-10 FX volatility this week (except for the British pound) FX risk sentiment is very gradually improving as the talks progress. Yesterday, China confirmed that tariffs on the import of U.S. cars would be reduced to 15% from 40% while promising to increase purchases of American agricultural products including soybeans. President Trump interjected himself into the discussions and said that he would intervene in the Huawei case if it would help lead to a successful conclusion to the talks.
Nevertheless, traders are still skeptical. China and the U.S. are far apart on U.S. demands for increased protection of intellectual property and the American’s claim of state-sponsored hacking.
Canada may be collateral damage if the trade talks deteriorate. China is furious at what it sees as "Canada’s meddling" for the arrest of the Huawei CFO, at the request of the U.S. Justice Department and fired the first shot. China arrested Michaël Kovrig, a former Canadian diplomat, in an obvious retaliation move.
Soggy oil prices are another major weight on the Canadian dollar. The Organization of the Petroleum Exporting Countries (OPEC) announced new production cuts of 1.2 million barrels per day, Libya oil production has been cut by 400,000 barrels per day due to rebel activity, Alberta trimmed its crude output, and U.S. crude inventories rose 10.1 million barrels. Yet oil prices are struggling to rally. West Texas Intermediate (WTI) is trading at $52.63 U.S./barrel which is well below the $76.85/b level seen just two months ago. Traders are concerned that forecast for slowing global growth in 2018 will reduce crude demand at the same time US production is at record levels.
The Canadian dollar is also suffering from broad U.S. dollar strength. The U.S. dollar has been in demand as geopolitical risks rise. French citizens rioted to protest the government’s fuel tax hike. The government said it was needed as part of an overall climate change effort. French citizens were outraged, and after days of civil unrest, the government backtracked. It canceled the fuel tax hike and tossed in a minimum wage increase to sweeten the pot. Markets viewed the actions as increasing the French budget deficit and indirectly supporting Italy’s budget plans. EUR/USD dropped, and the U.S. dollar demand undermined the Canadian dollar.
U.S. dollar moves will continue to drive Canadian dollar direction.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
