The Canadian dollar was sidelined in overnight trading, but it managed to hang on to most of Friday’s gains. Last week’s free-falling equity markets have Canadian dollar traders on full-alert for selling pressures due to risk aversion flows.
The Canadian dollar’s benefit from the more hawkish than expected Bank of Canada statement last week has faded, replaced by concerns that rising interest rates could derail economic growth. The loonie did not get much benefit from rising oil prices in September. However, the slide in West Texas Intermediate (WTI) oil since peaking at $76.60/barrel at the beginning of October has served to reinforce the floor. Oil traders are concerned that a prolonged US/China trade dispute will reduce global economic growth despite U.S. sanctions on Iran oil, starting November 4.
It will be a busy week for FX markets. The Bank of England policy meeting is Thursday. Traders will be looking for insight on the BoE’s outlook given the rising "no-deal" Brexit risks.
Canadian dollar traders are in for a busy week. August Gross Domestic Product is due on Wednesday and expected to be unchanged at 0.2%, m/m. Bank of Canada Governor Stephen Poloz reminded markets last week that the BoC is "data dependent." If Wednesday’s GDP report is stronger than forecast, it will ignite December rate hike chatter and give the Canadian dollar a lift. A weaker than expected report would undermine the currency, but to a lesser extent because a January rate hike is widely expected.
Canadian dollar traders are also gearing up for Friday’s Labour Force Survey. The forecast is for a gain of 25,300 jobs, well below September’s 63,300 rise. That result would not be a currency negative as it would still be substantially higher than the longer-term trend of 10,000 job gains per month. The Canadian data risks being overshadowed by the U.S. non-farm payrolls report. The U.S. is expected to add 190,000 jobs, but there is substantial upside risk. The September data was negatively affected by Hurricane Florence, which suggests the October results will benefit from a rebound.
Wednesday has a double whammy of being Canadian bank year-end and month-end for portfolio managers. The substantial underperformance of U.S. equity indices compared to Canada implies that portfolio managers will need to sell Canadian dollars.
The Canadian dollar is also at the mercy of China developments. The U.S. sanctions on China have contributed to the 10.5% drop in the Shanghai Shenzhen 300 index. Traders are extra vigilant to contagion risks spreading to the major global indices. China Manufacturing Purchasing Managers' Index data on Thursday could fuel renewed risk aversion if it is weaker than forecast.
Today’s U.S. data includes Personal Consumption Expenditures (PCE) and the Dallas Fed Manufacturing Business Index. However, traders will be focused on Wall Street. U.S. equity futures point to a positive opening today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
