The Canadian dollar will likely remain rangebound until mid-January. December is ending, and many major corporations, institutional accounts and hedge funds have closed their books for the year. The major risk events for the month have come and gone. European Central Bank (ECB) and Federal Open Market Committee (FOMC) monetary policy meetings finished without notable changes in policy. The U.K. election gave Prime Minister Boris Johnson a commanding majority and injected a new note of instability into Sterling.
Canada’s Finance Minister Bill Morneau provided a fiscal update on Tuesday. His boss, Justin Trudeau, still believes that "budgets balance themselves," as evidenced by the lack of budgetary restraint. Liberal budget deficits have exceeded their forecasts every year the party has been in office, and the outlook for 2020 is not different. The 2019 deficit is expected to be $26.6 billion, or $6.8 billion worse than projected and $29.4 billion worse than what was anticipated in 2015. Those numbers are flashing warning signals to Canadian dollar bulls as it limits the government’s ability to provide fiscal stimulus in the event of a negative economic surprise.
And the domestic economy is vulnerable, Alberta is still suffering from pipeline constraints, severely hampering its ability to get crude to markets. That means lower royalty payments to Ottawa and unless Federal government spending is curtailed, higher deficit. Crude isn’t the only commodity at risk. The Phase 1 U.S./China trade agreement says China must significantly increase its purchases of U.S. agricultural products, with amounts of $40-$50 billion tossed around. The increased U.S. market share must come at the expense of another country, and Canada is on China’s "naughty" list.
FX markets were tranquil overnight. The Australian and New Zealand dollars traded sideways in narrow ranges as the euphoria of the China and U.S. trade agreement faded. AUD/USD traders are mildly bearish after the release of the Reserve Bank of Australia minutes raised the risk of renewed monetary easing. A weaker-than-expected employment report on Thursday will exacerbate those fears.
USD/JPY traded quietly ahead of the Bank of Japan monetary policy meeting results, due tomorrow. The BoJ is expected to leave policy unchanged but increase its dovish bias.
EUR/USD shrugged off better than expected German IFO data and unchanged Eurozone Consumer Price Index data and traded with a negative bias. EURUSD dropped from 1.1153 to 1.1121 in early Toronto trading.
GBP/USD is trading in Toronto at $1.3084, just above its overnight low, as the prospect of another year of "brinkmanship" Brexit negotiations loom.
Canadian dollar traders are looking ahead to this morning’s Canadian inflation data. Headline CPI is expected to rise to 2.2% y/y, in November, compared to 1.9% in October. The U.S. data calendar is empty.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
