The Canadian dollar’s well-defined USD/CAD range of $1.3270-1.3520 is still intact and containing price movements. A drop in oil prices combined with an increase in risk aversion sentiment is undermining the currency in early New York trading.
That wasn’t the case overnight. The Canadian dollar surged in early Asia trading. USD/CAD dropped from the closing level of $1.3448 to $1.3412 in tandem with a steep rise in the Australian dollar in a move sparked by the central bank. The Reserve Bank of Australia surprised those traders expecting a rate cut when they left interest rates unchanged and said risks were to the downside. However, the Australian dollar gains were short-lived, and prices retreated, which also led to Canadian dollar selling.
There was a whiff of risk aversion in the air. The U.S./China trade talks have turned somewhat nasty. The Americans accused China of backtracking on previously agreed trade commitments and retaliated by announcing existing trade tariffs on Chinese imports would rise to 25% from 10% effective Friday at 12:01 am. The increase affects $200 billion of Chinese goods. Chinese officials said that they wouldn’t make concessions under threats. On the bright side, new trade talks are supposed to begin in Washington on Wednesday.
Political tensions in Turkey were another source of risk aversion concern. Prime Minister Recep Erdogan decided to annul election results in Ankara because they were tainted "organized crime and serious corruption." Skeptics believe the decision was made because Erdogan’s party
lost the vote. New elections are scheduled for June 23. The news capped EUR/USD upside while fanning the flamels of risk aversion.
The British pound retreated from its overnight peak after reports emerged that Conservative and Labour party negotiations were stalling which fed into the overnight risk aversion theme.
Oil prices took a beating on the news that the U.S. tariffs would go into effect on Friday. Oil traders are concerned about over-supply stemming from rising US production, production cuts by the Organization of the Petroleum Exporting Countries and a slowdown in global economic growth if the China/U.S. trade talks fail.
FX markets are mostly range-bound and directionless due to a lack of top tier, actionable U.S. economic data. The next key indicator is April Consumer Price Index, and it is not due until Friday.
Bank of Canada Governor Stephen Poloz’s speech yesterday was about the housing market and not monetary policy. Traders ignored it.
Today’s U.S. economic reports are third tier. In Canada, the Ivey Purchasing Managers Index data is expected at 53.0 compared to 54.3 in March. It will not likely have much impact on trading, leaving Canadian dollar direction to be determined by general U.S. dollar sentiment.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
