USD/CAD - Negative risk sentiment undermines Canadian dollar

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Canadian’s are heading off to the first long weekend of the summer. The Canadian dollar may be heading off a cliff. The domestic currency is probing the bottom area of its two week range in a move fueled by another increase in global risk aversion sentiment.

China blasted the US in a state media sponsored article, writing “If there is no real concrete action by the United States, it will be meaningless for you to come and talk. It is better to suspend the consultation completely and return to the normal working track.” Even so, Treasury Secretary Steven Mnuchin says he is planning to return to Beijing. China is irate over America’s ban of Huawei Technology. China’s major equity index, the Shanghai Shenzhen CSI 300 plunged 2.45%, and risk aversion fears ripple across Asia.

AUDUSD and NZDUSD traded lower on the back of the trade talks drama but also because the Reserve Bank’s of Australia and New Zealand have a dovish bias with rate cuts a real possibility.

USDJPY retreated from the 110.00 area and drifted down to 109.60. Safe-haven demand and falling US Treasury yields undermined the currency pair.

UK political developments spooked European markets and added another layer of risk aversion to trade sentiment. Prime Minister Theresa May’s plan to have another vote for her EU withdrawal agreement in the first week of June is expected to fail-again. Labour Party Leader Jeremy Corbett wrote a letter to the PM saying that the talks had gone as far as they could. Ms May has promised to resign if her Brexit deal doesn’t pass in June. If so, Prime Minister Boris Johnson could become a reality. GBPUSD has fallen from 1.3170 on Monday to a low of 1.2752 in early Toronto trading.

The sell-off in GBPUSD dragged EURUSD down with it, albeit modestly. EURUSD dropped from 1.1183 to test support at 1.1160, which has held. Prices are underpinned somewhat by Eurozone data released today. April CPI rose 1.7% y/y, as expected while Core-CPI rose 1.3%, beating the forecast of 1.2%, y/y. March Construction output was -0.27% compared to 3.04% in February. Today’s data supports the European Central Bank view that additional stimulus is not needed and the economy will rebound in the second half of the year.

Political tensions are behind the jump in West Texas Intermediate oil prices from $60.64/barrel on Monday to $63.61/b today. Iran/US warmongering continues to ratchet higher raising fears of new supply disruptions exacerbating the impact from existing Opec production cuts. The WTI increase has helped to slow Canadian dollar losses.

The only US data of note today is Michigan Consumer Sentiment. Canadian’s will be heading for the exits early as it is a long weekend.
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