The Canadian dollar came under renewed pressure yesterday when oil prices plunged again, in a move exacerbated by bullish technicals and broad U.S. dollar demand.
West Texas Intermediate traded at $58.75 U.S./barrel on July 31 and plunged to $53.65/b the next day. That’s because President Trump promised another round of tariffs against China, which raised fears that the new tariffs would accelerate a global economic slowdown. Prices consolidated in a $53.65-$56.00 range until China allowed the price on USD/CNY to trade above long term resistance at 7.0000.
Trump immediately accused China of currency manipulation. Later that day, the U.S. Department of the Treasury designated China as a currency manipulator. Oil was sold on the news, and WTI touched $50.70/b yesterday. Prices recovered alongside rebounding stock prices on Wall Street, and WTI rallied to close at 52.32/b yesterday. Prices traded sideways overnight.
The Canadian dollar tracked oil price movements, and it recovered alongside oil price gains. The domestic currency remains under pressure due to U.S./China trade tensions. Concerns that the Bank of Canada (BoC) may be forced to shift to a dovish monetary policy stance are also weighing on prices.
The BoC left rates unchanged July 10. Its quarterly Monetary Policy Report was fairly positive. The Bank summed up their view by saying "The Canadian economy is returning to potential growth. However, the outlook is clouded by persistent trade tensions."
Trade tensions are a popular theme among global central banks. The Reserve Bank of Australia, (RBA) the Reserve Bank of New Zealand, (RBNZ) the European Central Bank, (ECB) the Bank of Japan (BoJ) and the Federal Reserve are united in their concerns that the U.S./China trade war is impacting negatively economic growth. The Fed cut rates by 0.25% at the end of July. The RBNZ reacted more aggressively, delivering a surprising 0.50% cut to its benchmark overnight cash rate yesterday. The ECB is widely expected to kick off another round of quantitative easing in September.
The Bank of Canada stands alone. At the moment its monetary policy is neutral, but it may find it difficult to avoid cutting rates in the present environment.
FX risk sentiment perked up slightly overnight, even though China fixed USDCNY at 7.0039. The level was lower than expected and even better, China trade data exceeded expectations. China’s July exports rose 10.3% y/y while imports rose 0.4% y/y.
AUD/USD and NZD/USD rallied on the news. Gains were capped by lingering fears of fresh US/China inspired risk aversion waiting in the wings. USD/JPY traded in a narrow range but with a negative bias. Prices are undermined by safe-haven demand for yen and by soft US Treasury yields.
EUR/USD gave up its overnight gains in early Toronto trading in part due to an ECB Economic Bulletin saying, "the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets, is dampening economic sentiment, notably in the manufacturing sector."
Canada Housing Price index and U.S. Jobless Claims are the only economic data of note today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
