Yesterday, the Canadian dollar was broadsided by a rogue wave of oil. It hasn’t recovered. The bottom fell out of West Texas Intermediate (WTI) on Tuesday, and it triggered a 1.0% plunge in the currency, leaving it within spitting distance of its 2018 low.
WTI oil plunged from $57.34/barrel in Asia to $62.86/b in New York.The oil market sell-off was part of a broad shift into risk aversion trades that started when US equity markets plunged. Oil traders were already worried about the prospect of slowing global growth because of the US/China trade spat, and the Wall Street woes exacerbated their fears.
Oil traders were also concerned that even if the Organization of the Petroleum Exporting Countries and Russia agree to further production cuts at their December 6 meeting, they wouldn’t be enough to offset both slowing demand and rising U.S. crude production. The Americans produced a record 11.3 million barrels per day of crude in October. However, the American Petroleum Institute (API) reported a 1.5-million-barrel drop in U.S. crude inventories after the market closed which helped shore up prices overnight. WTI is currently trading at $54.75/barrel.
Falling oil prices were only part of the Canadian dollar’s problem. U.S. equity markets were dropping like flies. The Dow Jones Industrial Average dropped 2.2% which served to erase all of its 2018 gains. The S&P 500 and NASDAQ followed the DJIA lower. Wall Street traders turned negative due to weaker forward guidance from many major corporations including Apple. Traders are well aware that the current market rally was the longest in history and very vulnerable to a correction. All the same, the drop should be considered in the context of lower than usual volumes because of the U.S. Thanksgiving holiday.
The Canadian dollar lagged gains in the other commodity bloc currencies. AUD/USD and NZD/USD managed to claw back some of Tuesday’s losses supported by an uptick in commodity prices. The Japanese yen pared back its risk aversion gains after U.S. Treasury yields ticked higher.
The improved risk sentiment is evident in Europe where all the major equity industries have recorded gains today. EUR/USD got an added lift from news that the Italians may tweak their budget in hopes of appeasing the European Union.
The British pound traded steadily but with a bearish bias. U.K. Prime Minister Theresa May is meeting with European Union officials today to wrap up the Brexit deal. She still has a lot of work ahead of her to get the British parliament on her side.
The U.S. dollar opened in Toronto consolidating yesterday’s strong gains. The Canadian dollar traded in a narrow range ahead of a pre-U.S. Thanksgiving feast of American economic data. Durable Goods Orders, Initial Jobless Claims, Michigan Consumer Sentiment and Existing Home Sales data are all on tap.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
