The Canadian dollar is grinding out gains. The currency is in demand on the back of narrowing interest rate differentials between Canada and the United States. U.S. Federal Reserve Chair Jerome Powell’s testimony to the Congress left no doubt that not only will the overnight Fed funds range be cut 0.25%, but a 0.50% cut is also a possibility.
Powell and the majority of the Federal Open Market Committee seem to believe that a preemptive rate cut would stave off an imminent economic slowdown. Equity market traders think it will work. Rate cut lifted U.S. stock prices, and the Dow Jones Industrial Average closed at a record high on Thursday.
Soaring oil prices underpin Canadian dollar demand. West Texas Intermediate (WTI) the North American price benchmark, rose to $60.88 U.S. /barrel yesterday. Iran is threatening to impound British oil shipments traversing the Gulf of Hormuz in retaliation for Britain’s seizure of a cargo of crude in Gibraltar. Iran and the U.S. are in a war of words (and sanctions) because of the Americans unilateral repudiation of Iran Nuclear deal and Iran’s subsequent increase in enriched uranium production. Oil supply disruption fears powered WTI prices higher. Those fears were exacerbated when Tropical Storm Barry, off the coast of New Orleans, shut down drilling rigs.
The oil price rally stalled overnight after the International Energy Agency said that US oil production would outstrip global demand in the next nine months.
In Europe, FX traders were cautious, and the major currencies held to well-defined ranges. EUR/USD support from better than expected Producer Price Index data was eroded after Bank of Italy Governor Visco’s comments. The European Central Bank Governing Council member warned that the ECB would need to act if eurozone growth continues to stall. The prospect of further monetary easing capped EUR/USD gains.
The British pound seesawed in a $1.2522-$1.2552 range. Profit-taking demand ahead of the weekend ran into renewed "no-deal" Brexit concerns, which limited gains.
In Asia, the Australian and New Zealand dollar’s climbed on widespread U.S. dollar selling due to the dovish Fed outlook. However, news that China’s trade surplus with the U.S. increased put a lid on gains due to concerns the data would hamper the latest round of U.S./China trade talks.
Canadian dollar traders are looking ahead to next Wednesday’s Canadian inflation report. Headline Consumer Price Index is forecast to rise 2.0% y/y, in June which is the Bank of Canada’s target level. Higher than expected data will support the Canadian dollar as it could further delay the prospect of any BoC rate cuts.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
