The Canadian dollar is consolidating yesterday’s gains while dismissing a drop in oil prices. USD/CAD dropped from $1.4005 on Monday in Asia to a low of $1.3727 yesterday morning. Prices have bounced between $1.3730-$1.3830 ever since, and for the moment, the bias is for additional weakness.
The Canadian dollar gains are due to U.S. dollar selling pressure from portfolio managers. The over 4% month-to-date gain in the major U.S. stock indexes suggests portfolio managers will be selling U.S. dollars to realign their portfolios with their benchmarks. WM Reuters post the FX rates at 11:00 a.m. ET, on the last trading day of the month. The size of the potential flows, combined with thinner than usual FX liquidity, has forced some managers to execute their hedges ahead of the fixing time.
The U.S. dollar pressure also stems from renewed "risk-seeking" demand on hopes of a robust post-COVID-19 recovery. Those hopes may be misguided, judging by the South Korea experience. Officials in that country are re-implementing lockdown restrictions in Seoul, after seeing the largest spike of infections is two months.
The British Columbia Supreme court ruled against Huawei CFO Meng Wanzhou’s extradition to the U.S. fight. The court ruled that the offence with which Weng was charged would also be an offence in Canada, and therefore extradition proceedings could continue.
China’s Global Times claims the ruling means that "Canada lost judicial, diplomatic, and diplomatic independence due to U.S. bullying." They also cited "experts" who said the ruling would not affect Huawei. The Chinese wrote: "The 'unjustified' ruling, which will mean the continued detention of Meng, has no real impact on Huawei, because the company will not succumb to the U.S. because of any individual. But it will make Canada a pathetic clown and a scapegoat in the fight between China and the U.S.”
Canadian dollar traders who ignored the ruling should be cautious.
Australia was slapped with punitive tariffs on exports of barley, and imports from four meat producers were banned because China was unhappy with the Australian government's call for a COVID-19 inquiry.
Canada could suffer a similar fate.
FX markets will focus on this morning's release of the U.S. weekly jobless claims report.
The forecast is for claims to rise 2.1 million, well below last week’s 2.43-million increase. Better than expected results would suggest the U.S. economy is rebounding quickly, which would support risk-seeking trades. The other U.S. data, including Durable Goods Orders and Q1 GDP, are considered stale, and not a factor for FX traders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
