The Canadian dollar rallied yesterday and continued the move overnight. On Wednesday, the Bank of Canada left the benchmark overnight interest rate unchanged at 1.75%, which was largely expected. However, the somewhat neutral tone to the policy statement caught many traders by surprise. Analysts expected the BoC to telegraph an October rate cut due to U.S./China trade tensions. The U.S. Federal Reserve, Reserve Bank of Australia, and the Reserve Bank of New Zealand used the trade tensions to justify rate cuts, so expecting the BoC to follow suit wasn’t much of a stretch. Except that it was.
The BoC acknowledged the fallout from the Washington-Beijing spat. In a brief statement, it said: "As the US-China trade conflict has escalated, world trade has contracted, and business investment has weakened. This is weighing more heavily on global economic momentum than the Bank had projected in its July Monetary Policy Report (MPR)."
However, the central bank's assessment of the domestic outlook was rather positive. The BoC wrote: "In Canada, growth in the second quarter was strong and exceeded the Bank’s July expectation, although some of this strength is expected to be temporary. The rebound was driven by stronger energy production and robust export growth, both recovering from very weak performance in the first quarter."
The statement wasn’t dovish enough, which fueled Canadian dollar demand with a major assist from external developments. Global risk sentiment improved with news that China and the U.S. would resume face-to-face trade negotiations in September. Also, there are rumours that China may kick off another round of monetary easing.
The improved global risk sentiment combined with, soft U.S. Institute for Supply Management Manufacturing data Tuesday and fresh dovish expectations for the Fed, fueled broad US dollar selling. EUR/USD rallied and broke resistance at $1.1050 overnight, setting the stage for additional gains to $1.1160.
However, U.K. political developments created the biggest storm. Prime Minister Boris Johnson lost two critical votes in Parliament which served severely to downgrade the possibility of a "no-deal" Brexit on October 31. The losses increased the risk of a U.K. election around October 14-15 and raised hopes of either a new Brexit agreement or an extension to the October 31 deadline. GBP/USD soared, rising from $1.2211 at today’s European open to $1.2352 in early Toronto trading. The rally accelerated on news that Boris Johnson’s brother announced his resignation from the Conservative Party.
There is a shortage of Canadian data available today, but not in the U.S. The American data includes weekly Jobless Claims, ISM Non-manufacturing Index, and factory orders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
