The Canadian dollar rallied yesterday, then hit a wall. USD/CAD dropped from $1.2635 to $1.2597 in the morning, but the move was not sustained. Prices climbed, closed at $1.2640, then accelerated higher during the overnight session, reaching $1.2711 in early Toronto trading.
The primary reasons for the Canadian dollar’s change in fortune were external. Global equity indexes fell due to profit-taking, and a mild bout of risk aversion because of ongoing coronavirus concerns and the possibility that the Biden Relief plan will get watered down by the Senate.
The currency also suffered from a drop in oil prices.
West Texas Intermediate (WTI) the North American benchmark sank to $51.63/barrel from $53.13/b because of fears that ongoing COVID-19 restrictions will depress crude demand for longer than previously anticipated.
The Canadian dollar also retreated because analysts re-evaluated their conclusion that the Bank of Canada turned modestly hawkish on Wednesday.
It didn’t.
The BoC monetary policy statement said, "As the Governing Council gains confidence in the strength of the recovery, the pace of net purchases of Government of Canada bonds will be adjusted as required." Traders had a very mild Canadian version of the famous 2013 "taper tantrum" when the U.S. Federal Reserve spoke of "future tapering."
The problem is that statement contradicts the headline which said: "(The) Bank of Canada will hold current level of policy rate until inflation objective is achieved, continues quantitative easing."
Elsewhere, EUR/USD drifted higher in a $1.2153-$1.2189 range, after the European Central Bank monetary policy meeting statement was slightly more hawkish than expected, when it implied that the Pandemic Emergency Purchasing Program (PEPP) did not need to be used in full. Traders seemed less concerned about the Flash Purchasing Managers Index data. The IHS Chief Economist said, "A double-dip recession for the eurozone economy is looking increasingly inevitable as tighter COVID-19 restrictions took a further toll on businesses in January."
The British pound slumped on a wave of pre-weekend profit-taking, and negative risk sentiment, which took GBP/USD from $1.3735 to $1.3653. Worse-than-expected U.K. PMI data also weighed on prices. IHS/Markit described the data as "the steepest fall in U.K. private sector output since last May, as the third consecutive lockdown hits the service economy."
Canada Retail Sales are expected to be little changed from the October results (forecast 0.0%).
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
