The Canadian dollar is marching in place; making a bit of noise but not going anywhere. USD/CAD tested uptrend line support at $1.2960 last week, and since then it has been ratcheting higher. The gains have been fueled by external forces, particularly broad U.S. dollar strength, a
dash of risk aversion with a dose of soft oil prices added for good measure.
At the same time, Canadian dollar losses are being limited by anticipation of better than expected domestic economic reports later in the week.
Tomorrow, the August Gross Domestic Product report will be released. Economists expect GDP to rise 0.1%, a tad lower than July’s 0.2% gain, blaming recent soft economic data for the lower result.
There may be significant month-end portfolio re-balancing requirements to sell Canadian dollars due to the substantial drop in U.S. equity indices. A weaker than expected GDP report combined with the portfolio flows could lead to a sharply weaker currency. On the other hand, if August GDP surprises to the upside, the Canadian dollar will be in for a very whippy trading session.
The Canadian dollar is being buffeted about by constant shifts in risk sentiment, driven by equity market moves. Yesterday’s Wall Street plunge led to risk aversion trade demand. That demand eased late in the day when Wall Street rebounded into the close. The major indices still finished with losses but the end of the day rally set the tone for overnight markets. They were mixed with a notable rise in China’s Shanghai Shenzhen 300 Index.
The CSI rally occurred despite renewed, hostile trade rhetoric by U.S. President Trump. He is meeting Chinese President Xi Jinping at the G-20 meeting at the end of November. Trump threatened to impose tariffs on all Chinese imports if that meeting doesn’t result in progress on trade talks.
European developments undermined the Canadian dollar overnight. Euro-zone Q3 GDP was 0.2%, q/q and 1.7%, y/y, below the 0.4% and 1.7% that was estimated. Also, euro-zone Economic Sentiment and Business Climate indicators were lower than forecast. Yesterday, German Chancellor Angela Merkel said she would step down in December.
The data, Merkel’s resignation, and the E.U./Italy budget debate weighed on EURUSD and indirectly the Canadian
dollar.
The Canadian dollar is being hurt by the drop in oil prices and concerns that prices could fall further. Russian and Saudi Arabia announced plans to boost production to help alleviate any shortages because of the loss of Iranian crude due to U.S. sanctions.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
