Sentiment soured overnight, after the International Monetary Fund (IMF) issued its World Economic Outlook on Monday. FX markets shifted into risk-aversion mode, buying safe-haven currencies and selling riskier assets. As is usually the case, in that kind of trading environment, the Swiss franc and Japanese yen were in demand while the antipodean currencies suffered from selling pressures. The Canadian dollar did not go unscathed. It fell 0.18% compared to yesterday’s Toronto closing rate but outperformed the Australian and New Zealand dollars.
The IMF left their global growth forecast unchanged from their October update but downgraded euro-zone growth. They blamed a slowdown in Germany due to new automobile fuel emission standards and sovereign and financial risks in Italy for the reductions.
It got worse. The IMF wrote: "Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook. Financial conditions ha already tightened since the fall. A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a 'no-deal' withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.”
Asia equity indices closed in the red and European bourses are down as well. U.S. equity futures point to a negative open on Wall Street this morning.
The ongoing Brexit debate in the U.K. is another negative influence for traders. U.K. politicians appear eager to avoid a "no-deal" Brexit while European Union officials have said that there isn’t room for further negotiation. Prime Minister Theresa May said there would be another vote on her revised Brexit plan on January 29. The opposition is complaining that the new plan is just the old plan with a different date. However, traders think that the politicians are motivated to avoid a "no-deal." The bought GBP/USD and sold EUR/GBP.
Oil traders did not like the IMF Outlook, particularly the highlight of downside risks and they took their frustrations out on oil prices. West Texas Intermediate plunged from $54.02/barrel in Early Asia trading to $52.69/b just before New York opened. The oil price slide undermined the Canadian dollar.
FX trading sentiment is a touch negative because of the ongoing U.S. government shutdown. The closure as caused delays in the release of top tier U.S. economic reports from the Census Bureau and the Bureau of Economic Analysis. The lack of data prevents traders from getting a clear picture of U.S. economic developments.
The Canadian dollar may get undermined further if this morning's Wholesale Sales and Manufacturing Shipments data is weaker than expected.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
