The Canadian dollar is under pressure through no fault of its own. The blame lies solely at the feet of U.S. Federal Reserve Chair Jerome Powell and the Federal Open Market Committee (FOMC). It didn’t start that way. Yesterday, Statistics Canada reported May Gross Domestic Product rose 0.2%, beating the forecast for a 0.1% gain. The agency said "The increase was led by a rebound in manufacturing with 13 out of 20 industrial sectors expanding. On a three-month rolling average basis, real gross domestic product increased 0.7%."
The Canadian dollar rallied on the news. USD/CAD dropped from $1.3155 to $1.3120 before the move stalled. Prices dropped again after the Energy Information Administration (EIA) reported U.S. crude inventories fell 8.49 million barrels. The spike in West Texas Intermediate (WTI) oil prices sent USD/CAD down to $1.3105. Then, all the good Canadian dollar news was forgotten.
Traders shifted their focus to the FOMC statement. No one was surprised when U.S. rates were reduced by 0.25%. However, they were a tad surprised by Powell’s press conference remarks. Powell described the rate cut as a "mid-cycle adjustment." Then he confused matters by saying the rate cut wasn’t the first of many but adding it doesn’t just mean one more, either. Traders concluded that the Fed wasn’t as dovish as expected, which was supported by two Committee members, Esther George and Eric Rosengren, voting against the move.
The Canadian dollar got hammered. USD/CAD gained 0.52% between Wednesday and today’s opening levels.
The U.S. dollar rallied and continued to due so overnight. The euro lost the most against the U.S. dollar between yesterday and today’s Toronto opening levels, falling nearly 1%. Divergent Fed and European Central Bank (ECB) policies fueled the losses. The ECB has signaled its intentions to resume monetary policy stimulus at the September meeting while the Fed appears to be less dovish than expected. Today’s Eurozone Manufacturing Purchasing Managers Index data for July was a tick better than forecast at 46.5. However, it is still below the 50 level, which is the dividing line measure between economic expansion and contraction.
The British pound dropped to a 28-month low. Broad U.S. dollar demand following the FOMC announcement and the elevated risk for a "no-deal" Brexit fueled the selloff. Prices bounced from $1.2083 just before the Toronto open to $1.2125 in early trading today.
The Bank of England left rates unchanged and downgraded economic growth forecasts
USD/JPY rallied after the FOMC and then gave back all the gains by the start of trading in Toronto. Profit-taking and a drop in U.S. Treasury yields triggered the move.
AUD/USD and NZD/USD squeezed out small gains overnight supported by better than expected domestic and China PMI data.
Today’s U.S. data includes Institute for Supply Management Manufacturing PMI and weekly jobless claims.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
