The Canadian dollar outperformed the Australian and New Zealand dollars overnight but lost ground against the U.S. dollar. Asia markets appeared to have sated their risk appetites and adopted a more cautious tone heading into the weekend. There hasn’t been any improvement on the U.S. and China trade front, and tensions between Iran and the United States have escalated.
The lack of progress in U.S./China trade talks is one thing; however, deteriorating sentiment is another. National Economic Advisor Larry Kudlow described the situation as needing to "kick some butt" in an interview, yesterday. Hardly the language of diplomats. Even worse, he said that there weren’t any formal plans for President Trump to meet with Chinese President Xi Jinping, in Osaka, Japan, at the G-20 meeting, June 28-29.
The trade war is taking a toll in China. Industrial Production hit a 17-year low of 5.5% in May, which was below the forecasts of 5.5%. Fixed Asset Investment also declined but a jump in May Retail Sales to 8.6%, year over year, eased the sting.
The soft Chinese Industrial Production report underscored risks for a global economic slowdown which fueled risk aversion trades and lifted the U.S. dollar across the board. USD/JPY fell to 108.17 from 108.35, extending its losses since Tuesday. The down move was fueled by rising geopolitical tensions and the U.S./China trade impasse.
The Canadian dollar traded in a narrow range. The prospect of higher oil prices offset downside pressures from risk aversion sentiment. The U.S. accused Iran of attacking the oil tankers in the Strait of Hormuz yesterday. Secretary of State Mike Pompeo said the Americans had video evidence. Iran scoffed at the notion. Oil traders didn’t. The Trump administration is belligerent, and traders feared the war of words could become a war of missiles. The Strait of Hormuz is a crucial conduit for global oil supplies and fears those supplies could be disrupted underpinned oil prices.
West Texas Intermediate touched $53.27 U.S./barrel yesterday and bounced between $51.72 and $52.67/barrel overnight Prices have drifted towards the bottom of the range in early Toronto trading, which has reduced the negative pressure on the Canadian dollar.
Canadian dollar gains are being limited by risk-aversion sentiment stemming from the U.K. Conservative Party convention and the rising risk of a "no-deal" Brexit which would also create issues for the eurozone and EUR/USD.
Traders are looking ahead to today’s U.S. Retail Sales and Michigan Consumer Sentiment reports. Weak data would raise the chances that the Federal Reserve cuts interest rates. If so, the Canadian dollar would find some support.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
