The Canadian dollar was hoping for a "treat" rather than a "trick" with this morning’s release of the August Gross Domestic Product report. The forecast was for growth to be flat which would be mild "payback" from the better-than-expected 0.2% growth rate seen in July. There is a risk for an upside surprise to the data due to the elimination of oil production disruptions. If the report proved to be stronger than forecast, the Canadian dollar would rally. Conversely, weaker than expected data would undermine the currency.
The data may be overshadowed by external developments including U.S. economic data and month-end portfolio re-balancing flows. The month-end flows could have the most significant impact. U.S. equity indices dropped dramatically in October. The Dow Jones Industrial Average fell 5.99%, the S&P 500 is down 7.94%, and the NASDAQ lost 11.0%. These losses are expected to lead to sizable U.S. dollar buying around the 1600 GMT "Fix." However, price movements due to fixing flows are rarely sustained.
Today is Halloween. Costumed kids go door to door threatening "tricks" if "treats" are not forthcoming. Houses are decorated to scare, while orange and black colour schemes dominate. FX and equity markets have been scary for traders and investors for all of October, not just today.
U.S. dollar bears suffered greatly, led by a 2.45% rise in the greenback against the Swiss franc, a 2.29% gain against the euro and a 2.26% increase against the British pound. The Canadian dollar was not unscathed. It lost 1.76% between the September closing rate and this morning’s opening level.
The Canadian dollar losses occurred in a month when there were a couple of major, positive Canadian developments. The United States, Mexico, and Canada agreed to a new trade deal while the Bank of Canada raised interest rates and shifted to a more hawkish stance.
FX traders looked past Canadian domestic developments and were concerned about global macroeconomic and geopolitical issues. The European Union and Italy are at odds over Italy’s plan to boost budget deficit spending to 2.4% of GDP. That move flies in the face of euro-zone policies, but the new Italian government is focused on appeasing their voters not European Central Bank mandarins. Those concerns led to EUR/USD selling, and the Canadian dollar was collateral damage. Also, the ECB continues to maintain a dovish bias while the U.S. Fed has a hawkish stance.
The ongoing China and U.S. trade dispute shows no signs of an easing of tensions. In fact, President Trump threatened to put tariffs on all Chinese imports if the scheduled meeting between himself and President Xi Jinping at the end of November doesn’t lead to trade negotiation progress.
The October global equity market meltdown led to widespread demand for U.S. dollars as traders sought safe havens and once again, the Canadian dollar was sold alongside the other major G-10 currencies.
There isn’t any top-tier U.S. economic data today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
