USD/CAD - Canadian Dollar Caught in the Middle

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The Canadian dollar is torn between bullish U.S. dollar sentiment and rising oil prices. The greenback is grinding higher despite the dovish turn to the Federal Open Market Committee (FOMC) outlook. At the end of last year, economists and markets were expecting the Fed to raise interest rates tow, possibly three times in 2019. However, after Fed Chair Jerome Powell ’s dovish policy outlook flip on January 4 and the follow-up dovish FOMC meeting on January 30, rate hike forecasts were pared to just one, and that would be next December.

U.S. dollar selling after the Fed meeting was short-lived, in part because other major central banks followed in the FOMC’s footsteps. The greenback has also been in demand as a safe-haven currency. FX traders are concerned about the ongoing U.S./China trade dispute, contagion effects from a "no-deal" Brexit, and the risk of another U.S. government shutdown at the end of this week. The broad U.S. dollar demand undermined the Canadian dollar.

Rising oil prices have acted as a drag on Canadian dollar selling pressures. West Texas Intermediate (WTI) started 2019 at $45.50/barrel and climbed to $55.65/b, last week. Oil prices are underpinned by production cuts by the Organization of the Petroleum Exporting Countries that came into effect on January 1. Yesterday, Saudi Arabia said it would cut March crude production by 500,000 barrels/day.

China/U.S. trade talks are underway in Beijing. There was a mildly positive shift in risk sentiment overnight after President Trump suggested he could extend the March 1 deadline. U.S. tariffs on $200 billion of Chinese imports are set to rise to 25% on that date. A delay implies the talks are progressing toward a positive resolution.

However, traders are concerned about the risk of a U.S. government shutdown on Friday. The Republicans and Democrats think they have cobbled together a solution to fund the government and the Mexican border wall. Trump is less than thrilled with the deal, and could veto it.

Overnight, FX markets interrupted periods of calm with bouts of volatility. GBP/USD traded higher in Asia and then erased the gains before the New York open. A tweet from a U.K. journalist suggesting that the two main U.K. political parties were finally meeting to discuss Brexit details and stumbling blocks sent GBPUSD soaring to $1.2957 from $1.2895. Prices have since erased that move as well.

The New Zealand dollar outperformed all the major G-10 currencies overnight. NZD/USD rallied to $0.6849 from $0.6729 after the Reserve Bank of New Zealand left rates unchanged but issued a policy statement that was not as dovish as expected. The Canadian dollar climbed alongside the antipodean currencies.

U.S. inflation data is due today. Headline Consumer Price Index is expected to rise 1.5% compared to December's increase of 1.9% because of lower energy prices.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
Learn how KnightsbridgeFX can help you save up to 2% when buying or selling US dollars compared to your Canadian bank’s rates – click here to compare bank rates