The Canadian dollar is underwater, although not as deep as it was yesterday. USD/CAD spiked to $1.3795 from $1.3635 yesterday due to a wave of U.S. dollar demand against the major G-10 currencies. U.S. President Trump’s plan to eliminate payroll taxes for the rest of the year, and promises to provide support for hourly workers, airlines and the cruise industry fueled demand for US equities and improved the U.S. economic growth outlook.
The Canadian dollar also suffered from the steep plunge in oil prices. Saudi Arabia is so unhappy with Russia’s refusal to agree to the Kingdom’s oil production cut plan, they started a market share war, by slashing prices for crude. West Texas Intermediate dropped from $46.10/barrel on Friday to $27.33 on Monday. Prices have recovered, but the gains have been meager. WTI is trading at $33.11/barrel in Toronto. The American Petroleum Institute (API) said that US crude inventories rose 6.4 million barrels in the week ending March 6, which weighed on prices overnight.
The drop in oil prices is a huge negative for the domestic oil industry. Anti-energy Federal government policies have led to the cancellation of many mega-oil projects. The government’s lack of support for new oil pipelines exacerbates distribution issues, which significantly reduces oil royalty payments to the Federal coffers. That isn’t a new problem, but it will limit Canadian dollar gains.
China is showing signs that the worst of the coronavirus outbreak is behind it. Beijing has closed temporary hospitals, and the epicentre of the outbreak was deemed safe enough for President Xi Jinping to visit. Unfortunately, China’s gain is Europe’s pain. The COVID-19 outbreak in Italy has essential closed the country. German Chancellor Angela Merkel warned that up to 70% of the population could be infected. The U.K. health minister is one of 362 cases in Britain.
Coronavirus fears spurred the Bank of England to action. The BoE slashed the Bank Rate to 0.25% from 0.50% It took action because "risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth. Indicators of financial market uncertainty have reached extreme levels." GBPUSD traded erratically following the news, dropping to $1.2834 before spiking to $1.2953.
The Canadian dollar opened with a small gain compared to yesterday’s close, but has since deteriorated in early trading. Today’s price action will be determined by Wall Street equity moves, oil price action and Trudeau’s stimulus plan. There are not any notable economic reports on tap.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
