The Canadian dollar rallied overnight. It recouped all of yesterday’s losses and most of Monday’s as well. Oil prices, Fed speak, and U.S. dollar sentiment all played a role in renewing Canadian dollar demand.
The American Petroleum Institute reported a 4.20-million-barrel drop in U.S. crude inventories for the week ending February 22 after yesterday’s U.S. market close. The news underpinned crude prices overnight, and West Texas Intermediate (WTI) oil climbed steadily, rising from $55.75 to $56.62 U.S. in Toronto trading this morning. Traders have dismissed President Trump’s twitter complaint about the Organization of the Petroleum Exporting Countries' "high prices" and are focused on rising demand expectations from a successful China/U.S. trade negotiation. Also, OPEC production cuts and Venezuela sanctions are supporting prices.
The Canadian dollar also benefited from technical analysis. USD/CAD gains stalled below the two-week downtrend line at $1.3240 and the subsequent retreat broke intraday support levels at $1.3180 and $1.3160. The $1.3160 level is also the 200-day moving average, and uptrend line support from October comes into play at $1.3115 which may limit USD/CAD downside.
Statistics Canada releases the important inflation report this morning. January Consumer Price index is forecast to rise 1.5%, which is weaker than the December 2.0% gain. Lower gas prices are one reason for the price decline, but StatsCan has tweaked its methodology which may distort the results. Nevertheless, weaker than expected data will lead to Canadian dollar selling while stronger results will trigger Canadian dollar demand.
Overnight, the Canadian dollar drifted lower alongside is G-10 major currency peers, except against the Australian and New Zealand dollars. Both currency pairs suffered from a mild bout of risk aversion. AUD/USD had added issues stemming from weaker than expected Construction data. They were the only currency pairs to open in New York weaker than where they close.
A mild bout of risk aversion affected Asia FX markets after Pakistan reportedly shot down two Indian fighter jets. Pakistan’s was retaliating after India attacked "terrorist" camps in Kashmir, a province both sides claim as their own. India and Pakistan are nuclear-armed states which is why this skirmish got the attention it did. USD/JPY responded to the India/Pakistan news and was sold on safe-haven demand, but the demand was limited.
Sterling was the star performing currency again. GBP/USD soared to $1.3335 from $1.3234 as fears for a "no-deal" Brexit diminished. Yesterday, U.K. Prime Minister Theresa May agreed to allow MPs to vote on delaying Brexit. There is also speculation of another referendum.
U.S. Federal Reserve Chair Jerome Powell testifies before the House today in his second day of congressional testimony. Yesterday, he reminded markets that the Fed would be patient, suggesting there won’t be any rate hikes in the near future, which contributed to the broad U.S. dollar weakness. He is likely to echo those remarks today.
Today’s U.S. data includes Pending Home Sales and Factory orders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
