The Canadian dollar is on fire. The perfect storm of falling oil prices, a dovish Bank of Canada, a stock market meltdown and a somewhat hawkish U.S. Federal Reserve that knocked the loonie for a loop in December, is just a bad memory today. The Canadian dollar soared over 3% since the New Year began and a complete reversal in crude oil fortunes is behind the lion’s share of the rally.
West Texas Intermediate (WTI) has surged over 22% since Boxing Day. The production cuts by the Organization of the Petroleum Exporting Countries and Russia, and a somewhat optimistic outlook around the China/U.S. trade dispute, have fueled oil demand. Also, thin markets because of holidays and year-end appeared to exaggerate the oil price decline. The Alberta government forced a 325,000 barrel/day production cut on producers while added use of rail tankers increased shipments of Western Canada Select (WCS). That combination led to a sharp narrowing of the discount between WCS and WTI from $29.50 U.S./b to $9.00/b as of Tuesday.
The good news kept coming, and the Canadian dollar kept steaming higher. The Bank of Canada issued a modestly positive interest rate policy statement yesterday after it left rates unchanged. The BoC statement used a lot of space to explain the impact of falling oil prices on its outlook which if that was the only factor, would have made it a totally dovish statement. But it wasn’t.
The BoC pointed out that oil market issues "are occurring in the context of a Canadian economy that has been performing well overall. Growth has been running close to potential, employment growth has been strong, and unemployment is at a 40-year low. Looking ahead, exports and non-energy investment are projected to grow solidly, supported by foreign demand, the CUSMA, the lower Canadian dollar, and federal tax measures targeted at investment."
Canadian interest rates are still below the Bank’s "neutral" range, and economists expect two rate hikes in 2019, especially if the BoC forecast is correct and domestic growth rebounds in the second half
Markets were still digesting the BoC statement and Monetary Policy Report when the Fed released the minutes from its December 19 Federal Open Market Committee meeting from December 19. At that time Fed Chair Jerome Powell came across as "married to the view" that U.S. rates would continue to rise while ignoring recent equity market carnage. Wall Street took Powell’s comments negatively and crushed stocks further. Things changed on January 4 when Powell appeared to reverse himself and suggested that the Fed could afford to be patient with further rate hikes. Stocks rallied and continued to do so. The Federal Open Market Committee minutes confirmed that the Committee favoured a patient approach to rate hikes and the Canadian dollar, along with the major G-10 currencies rallied further.
FX markets are likely to consolidate yesterday's gains in a subdued session today as there isn’t much notable data due from Canada or the US available.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
