The Canadian dollar pushed off to the side overnight. All the attention was on sterling and news of a Brexit breakthrough. U.K. Prime Minister Theresa May returned from Strasbourg and a meeting with European Commission President Jean-Claude Juncker last night. In her hand was her original Brexit deal with a few key amendments. She lost the original vote on January 15 by a margin of 202 votes. She is hoping that at least 116 Members of Parliament will change their minds after seeing the new terms.
Asia traders thought they might. GBP/USD soared from $1.3151 to $1.3286 on the news. In Europe, U.K. traders were a tad less enamoured with the terms of the new proposal and sold GBP/USD which was exacerbated when the U.K. attorney general said the Brexit backstop risks are unchanged from the original agreement. Then a "source" from the Irish Democratic Union Party (DUP) said it was unlikely that they would back the deal. GBP/USD collapsed to $1.3006 in early Toronto trading.
Overnight, the initial Brexit news and a report that senior U.S. and Chinese officials were talking trade led to a positive shift in risk sentiment. Chinese Vice Premier and trade negotiator Liu He and U.S. Trade Representative Robert Lighthizer reportedly chatted on the phone about the text of a trade agreement and the next stages. That was enough for traders who were waiting to hear something on the U.S./China trade talks. They bought Australian, New Zealand, and Canadian dollars. However, the gains were erased in early Toronto trading. The GBPUSD retreat undermined risk sentiment and lifted the U.S. dollar across the board, including against the Canadian dollar.
Oil prices have mitigated Canadian dollar losses. West Texas Intermediate (WTI) has risen 6.0% between March 8 and last night, rising from $54.50 to $57.78 U.S./barrel. Price retreated in Toronto this morning after risk sentiment took a turn for the worse after hope for a Brexit deal were trashed. WTI is underpinned by the slightly improved odds that China and the U.S. will reach an accord on trade. A trade deal suggests improved global economic growth and therefore, rising oil demand.
However, the Canadian dollar is not seeing much demand because of oil prices. Instead, it is under pressure because of the Bank of Canada’s outlook. Last week, the BoC admitted it was surprised with the weakness of the economy in Q4. That surprise led the bank to downgrade its Q1 and Q2 outlooks. Economists pushed out their interest rate forecasts until late 2019, early 2020. The Canadian dollar has been on the defensive ever since.
U.S. inflation data is due this morning but expected to be unchanged from January.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
