The Canadian dollar is grinding sideways in a narrow trading range. Canadian dollar sellers because of plunging oil prices are finding plenty of buyers because of expectations for higher domestic interest rates in December. The opposing views have re-enforced support and resistance levels. A lack of actionable, top-tier Canadian economic data has exacerbated the market ennui.
The short-term Canadian dollar sentiment is bearish. The currency is undermined by broad U.S. dollar strength against the G-10 major currencies on concerns that the Federal Reserve may raise rates at a faster pace than previously expected. However, those concerns eased, somewhat late yesterday afternoon. Fed Chair Jerome Powell said that he was pleased with the state of the U.S. economy but warned of potential headwinds to growth from the erosion of fiscal stimulus and a slowdown in housing. FX traders appeared to believe Powell’s reference to headwinds indicated that the pace of U.S. rate hikes might slow. His remarks helped improve the overall risk sentiment and supported the other commodity currencies. USD/JPY dropped on the news as did U.S. Treasury yields.
U.K. political drama has garnered the bulk of the FX focus and contributed to the Canadian dollar’s narrow trading range. Yesterday’s news that U.K. Prime Minister Theresa May had secured a Brexit agreement with the European Union and got cabinet approval for the deal gave the British pound a boost. That boost was short lived. Brexit Secretary Dominic Raab was not impressed with the deal, and he resigned his cabinet position. He is the fourth minister to resign, and it has fueled speculation that May could face a "no-confidence" vote. GBP/USD dropped on the news, falling from $1.3029 to $1.2753. The subsequent bounce has been shallow which could be a harbinger of further weakness ahead. U.S. dollar strength against sterling spread to euro and if it continues, will limit Canadian dollar gains in the short term.
EUR/USD was another victim of the sterling-induced U.S. dollar rally although its drop was limited. News that Italian Prime Minister Conte is in talks with the European Union about Italy’s proposed budget provided some support.
Global risk sentiment got a bit of a lift from news that China is attempting to jump-start U.S. trade talks. China reportedly sent a proposal to the U.S. government which is seen as a "good-faith move" ahead of the expected talks between Presidents Trump and Xi Jinping in Argentina at the end of the month. The news was greeted warmly in Asia and helped to lift Chinese stock markets and commodity currency prices.
The Canadian dollar may lose ground today if this morning’s U.S. Retail Sales report surprises to the upside. October Retail Sales are expected to rise 0.5%. There aren’t any Canadian data reports today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
