The Canadian dollar extended yesterday’s gains overnight and is poised to finish this month 2.7% higher than it was on April 1. The latest bout of Canadian dollar strength has been driven by a 77% rebound in oil prices since Tuesday and by sizeable portfolio re-balancing demand for Canadian dollars.
However, further gains beyond today are not likely to be sustained. Wall Street stocks rallied strongly in April with the S&P 500 index gaining over 17% since the beginning of the month. Those gains mean that many equity portfolio managers need to sell U.S. dollars to bring their positions back into line with their mandates and benchmarks. That Canadian dollar demand will disappear shortly, eliminating a major factor supporting the currency.
The WTI oil price rally since Tuesday has been impressive. However, for most Canadian oil producers, the gains are still well below the price point they need to break even on production costs. Traders are hoping that Organization of the Petroleum Exporting Countries/Russia oil production cuts and the easing of coronavirus restrictions in major cities around the world will provide additional support to prices.
Unfortunately, gains will be limited as oil supplies continue to outstrip demand.
The Federal Open Market Committee left U.S. interest rates and policy unchanged, which was expected after three FOMC meetings in March. The FOMC left the door open to further stimulus measures saying, "The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals." The outlook wasn’t too optimistic saying "Millions of workers are losing their jobs. Next week’s jobs report is expected to show that the unemployment rate, which was at 50-year lows just two months ago, has surged into double-digits. Household spending has plummeted as people stay home, and measures of consumer sentiment have fallen precipitously." Nevertheless, U.S. stocks rallied because the statement implied low rates would be around for the foreseeable future.
The Wall Street rally set the tone for Asia markets which followed suit and were supported by an improved tone to risk sentiment when China Purchasing Managers Index data was released, which was in line with forecasts.
Traders largely ignored a host of Eurozone economic data. Eurozone GDP dropped 3.8% y/y in Q1, but that was viewed as “old news.” Traders are awaiting the European Central Bank press conference later this morning.
U.S. Jobless Claims will get a lot of attention today as they are expected to increase by 3.5 million.
However, the data is not likely to be of concern to FX traders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
