The Canadian dollar rallied yesterday. The move was partially due to anticipation of a business-friendly, federal government Fall Economic Statement, which proved prescient. Finance Minister Bill Morneau bowed to competitive pressures and significantly increased business depreciation allowances on capital spending. It was a move to alleviate completive pressures stemming from U.S. President Trump’s corporate tax cuts. It was also an expensive move, projecting an $18.1-billion deficit in 2018 and $19.6-billion deficit in 2019.
Canadian dollar gains may be limited. West Texas Intermediate (WTI) oil prices have lost all their gains since October 2017. Oil price sentiment is bearish despite U.S. sanctions on Iran crude exports. That’s because the sanctions were not as severe as initially expected. The Americans granted waivers to many of Iran’s largest customers, including China, India, Japan and South Korea. The ongoing China/U.S. trade war is another oil price negative. The U.S. could slap another $267 billion of tariffs on Chinese imports in January 2019. The International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) warned of slowing Chinese and global growth due to the U.S. actions. A global slowdown would reduce demand for crude oil at the same time U.S. production is at record levels.
The Canadian dollar also got a boost from mixed to soft economic reports on Wednesday.
Initial Jobless Claims, Durable Goods Orders and Michigan Consumer Sentiment data were all softer than expected. The weak reports supported some views that the pace of U.S. rate hikes will slow in 2019.
This week’s large price swings in the Canadian dollar may have been exaggerated because of less than stellar liquidity conditions. The U.S. Thanksgiving holiday is the most prominent American holiday of the year. Employees schedule vacations around the data, and many take the entire week off.
Canadian dollar traders are also watching U.K. and euro-zone developments carefully. U.K. Prime Minister Theresa May met with European Union officials yesterday to finalize the Brexit deal. GBP/USD soared this morning when E.U. President Donald Tusk has agreed to terms in principle. A Brexit deal would greatly reduce negative risk sentiment, not only for the British pound but for global FX markets.
Italy and European Union officials are working through their Italian budget differences, but concerns about possible E.U. penalties being levied on Italy have stifled EUR/USD trading. The lack of price action in that market gave Canadian dollar traders a reason to sit on the sidelines.
The Canadian dollar is expected to consolidate yesterday’s gains in an uneventful trading session today due to the U.S. Thanksgiving holiday and a lack of economic data.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
