The Canadian dollar bounced in a choppy, low volume FX session in Asia and Europe. FX markets are suffering from a lack of official guidance from U.S. Federal Open Market Committee (FOMC) officials and top-tier U.S. economic data. August is traditionally "holiday season" in large parts of the U.K., and Europe which leads to lower liquidity and frequently, higher volatility. Recent FX price action is evidence of this phenomenon.
The Canadian dollar is a global currency and thus exposed to global developments. The Turkish lira free-fall led to Canadian dollar selling due to widespread demand for safe-haven trades. The Japanese yen and Swiss franc are the usual destinations, but Canada is not.
The Canadian dollar recovered from its overnight low when Monday’s risk aversion trades were pared back. The Turkish lira recovered somewhat after the central bank took measures to shore up the currency. Traders are also expecting interest rate hikes. USD/TRY dropped from 6.9550 to 6.4201 in Europe, and although prices bounced back to 6.5775, global equity markets have rallied. Asian and European bourses are in the green, and U.S. equity futures point to a positive opening on Wall Street.
The Canadian dollar underperformance in recent days’ mirrors that of the Antipodean currencies, Both AUD/USD and NZD/USD have suffered large losses due to elevated U.S./China trade tensions and broad US dollar strength. In Asia, China reported weaker than expected Retail Sales and Industrial Production data. Retail Sales rose 8.8% which was below the 9.0% forecast. Industrial Production, at 6.0% missed the 6.3% forecast. Compared to G-10 countries, the China economic reports are robust. However, they point to slowing economic growth which suggests lower global growth.
The Canadian dollar is on the defensive because of the ongoing North American Free Trade Agreement re-negotiations. Canada has not been invited to take part in the latest round of U.S./Mexico talks, and President Trump has tweeted his preference to deal with Mexico first and Canada later. There are also reports that the U.S. Trade Representative Robert Lighthizer dislikes his Canadian counterpart, Chrystia Freeland. President Trump doesn’t appear to be too enamoured with Prime Minister Trudeau either, adding another layer of difficulty to the negotiations.
The damage to the Canadian dollar has been limited thanks to statements from Bank of Canada Governor Stephen Poloz. He stressed that monetary policy decisions were "data dependent not headline dependent" which has provided a degree of support to the currency. The recent Canadian data has been robust. The August 10 Canadian employment report was strong despite all the gains being part-time jobs. One of the reasons is because July data is skewed by summer employees and holidays.
Canadian dollar traders will get top tier data on Friday when Consumer Price Index is released. Until then, USD/CAD direction will continue to be at the mercy of broad U.S. dollar sentiment.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
