The Canadian dollar is on the defensive. It is not alone. The rest of the G-10 major currencies have suffered the same fate as the greenback extends gains ahead of Fed Chair Jerome Powell’s Jackson Hole speech. Mr Powell’s address is titled "Challenges for Monetary Policy." It is already causing challenges for US dollar bears, especially in the Eurozone.
FX markets are focused on the Jackson Hole speech as they hope Powell will shed some light on the Fed’s monetary policy outlook. The minutes from the July 31 Federal Open Market Committee meeting showed a house divided. Some members wanted to raise rates, while others wanted a 0.50-basis-point cut, rather than the 0-0.25% which was delivered. Markets are hoping for additional clarity on what the Fed means by a "mid-cycle adjustment." Does that mean the latest cut was merely a "tweak" and rates will remain unchanged or was the July 31 cut the start of something more?
Powell is center-stage at 10 a.m., Toronto time, but he may be overshadowed by President Trump, who is at the G-7 meeting in France. The President has hijacked the agenda at two previous meetings and made the discussions all about him and his trade policies. It is hard to believe he will act differently at this meeting.
The New Zealand dollar rallied, albeit slightly, after comments from Reserve Bank of New Zealand Governor Adrian Orr. He justified the August 7, 0.50 basis-point rate cut, saying the now the RBNZ "can afford to watch, wait and observe." Traders interpreted the comments to mean the Bank is on hold for the foreseeable future.
The British pound had a wild twenty-four hour ride. GBP/USD soared from $1.2110 yesterday to $1.2270 and then retreated to $1.2205 in early Toronto trading, today. The catalyst were comments made by German Chancellor Angela Merkel, which were taken out of context by the press. The headlines said she was open to dropping the Irish backstop if the U.K. had another idea. What she said was far different and more along the lines of if there is a solution, she hopes it could be found within 30 days.
EUR/USD is under pressure from a combination of dovish expectations around the next European Central Bank meeting, and bearish short term EUR/USD technicals. The idea that the pace of US rate cuts may be much slower than previously anticipated also weighs on the currency.
Canadian dollar direction is dictated by U.S. dollar sentiment. Better than expected domestic data doesn’t provide much support as evidenced by the quick reversal of Canadian dollar gains following the inflation report. Canada Retail Sales are on tap today and expected to be flat.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
