The Canadian dollar is trading like it’s a U.S. dollar proxy, especially when compared to the other commodity bloc currency pairs. Since the beginning of February, AUD/USD has dropped 1.7%, and NZD/USD is down 2.3%. The bulk of the losses are attributed fears that the Coronavirus outbreak will have a negative impact on Australian and New Zealand economic growth due to slowing trade with China.
China is the largest trading partner for both those countries. The Canadian dollar is not in that boat. China may be Canada’s second-largest trading partner, but China trade is far below that with the U.S. The Canada/U.S. trade volume is over three times as great as than Canada/China trade, and the U.S. economy is still expanding.
Many analysts believe that the U.S. dollar is in demand because the search for yield has led global investors to sell low yielding Japanese and Eurozone investments in favour of higher-yielding U.S. assets. The U.S. Fed funds range is 1.50-1.75%. The European Central Bank deposit rate is -0.5%, while the Bank of Japan rate is -0.10%.
Canadian rates are just as favourable as those of the U.S. The Bank of Canada overnight rate is 1.75%, which helps explain the Canadian dollar’s resilience in the face of broad US dollar strength against the G-10 majors.
The U.S. dollar is poised to close the week with gains across the board. The New Zealand dollar was the worst-performing currency, losing 1.90%, followed by the Japanese yen, which dropped 1.85%. The Canadian dollar is on pace to finish unchanged for the week unless Canada December Retail Sales data sharply deviates from consensus.
Retail Sales are forecast to rise 0.1% m/m compared to November’s 0.9% m/m increase. The results may Higher than expected data may be dismissed because of higher gasoline prices. On the other hand, weak results would spark chatter about the need for the Bank of Canada to cut interest rates.
West Texas Intermediate (WTI) oil prices are giving the Canadian dollar a bit of a boost, after rising from $50.90/barrel on Tuesday to $52.89/b today. Prices are supported by hopes Russia supports Saudi Arabia’s call for the Organization of the Petroleum Exporting Countries to cut crude production by another 600,000/barrels per day.
A nascent EUR/USD rally, stemming from better than expected euro-zone Purchasing Managers' Index data, was short-lived.
German Manufacturing and Composite PMI data were better than expected, and EUR/USD rose to $1.0819 from $1.0785. The rally derailed by fears that the Coronavirus outbreak was spreading to more counties. EUR/USD dropped to $1.0799 in Toronto trading.
There is a risk that the U.S. dollar could see some selling pressure today on the back of profit-taking ahead of the weekend.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
