The U.S. dollar tested major support levels against some of the major G-10 currency pairs but was unable to extend gains. The greenback retreated, albeit modestly, in overnight trading which led to Canadian dollar buying as a result.
The Canadian dollar outlook was looking rather dire last week as more than a few analysts were forecasting sharp losses against its U.S. counterpart in the coming months. The Canadian dollar rally since last Thursday injected an element of two-sided risk to the forecasts looking for a weaker currency.
Bank of Canada Governor Stephen Poloz’s modestly upbeat domestic outlook expressed in a speech on Monday, coincided with an improved global risk sentiment tone. The governor reiterated that BoC policy was "data dependent" while saying that the domestic economic weakness was transitory. Poloz also said that rates were still below their "neutral range", implying that if the objective is the neutral rate, then Canadian rates are going higher, at some point. His comments also helped to ease concerns that domestic rates would be cut which is already a low-risk proposition.
Global risk sentiment improved sharply this weak thanks to trade and data. On Monday, China Manufacturing Purchasing Managers Index data beat expectations and helped improve the outlook for global growth. That outlook was reinforced overnight when China non-manufacturing PMI data rose higher than forecast. The news lifted the Antipodean currencies and commodity prices.
The China/U.S. trade talks are back in focus. China Vice Premier Liu He heads up a trade delegation that meets in Washington today. The Financial Times reported that the two sides have resolved most of the major issues and that an agreement is within reach. The two sides are hammering out details of how an agreement could be enforced. If it works, China President Xi Jinping and President Donald Trump will meet before the end of the month to sign the deal.
USD/JPY got into the act and is testing key resistance in the 111.50-60 area in early Toronto trading. The upbeat outlook for global growth helped lift U.S. Treasury yields which underpinned the currency pair and supported CAD/JPY buying.
EUR/USD traders got into the act as well. The single currency rejected losses below significant support in the 1.1170-80 zone yesterday. Prices rallied in Europe fueled by better than expected euro-zone non-manufacturing PMI and Retail Sales reports, which helped ease the sting from soft euro-zone data last week.
Oil prices continued to climb, peaking at $62.86 U.S./barrel overnight, which fueled Canadian dollar demand.
Traders are awaiting this morning’s U.S. ISM non-manufacturing report which is expected at 58.0, below the February result of 59.7.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
