The Canadian dollar started sinking on Monday, and it hasn’t found a bottom, yet. Soft oil prices, geopolitical issues and the US/China trade impasse have weighed on sentiment, and that is unlikely to change until after Presidents Trump and President Xi meeting on the weekend.
The Canadian dollar is unlikely to get support from Friday’s Q3 Gross Domestic Product report. The forecast is for a gain of 0.1% in September or 2.0% year over year. Weak economic growth and weak oil prices are a recipe for a weak Canadian dollar.
Domestic issues aside, the Canadian dollar has been undermined by widespread demand for U.S. dollars stemming from the escalating China/U.S. trade tensions. Those tensions may be coming to a boil on the weekend when the two presidents meet in Argentina at the G-20. The Americans are poised to increase tariffs on $250 billion of Chinese imports from 10% to 25% as of January 1, 2019.
Also, Trump is threatening tariffs on another $267 billion of Chinese imports in January. One school of thought is that the president’s harsh words and threats are merely a negotiating ploy to spur China into making concessions. They believe that the recent equity market weakness will motivate Trump to work with China. Analysts believe that if China improves its trade proposals, Trump will delay raising tariffs or imposing new ones.
The Canadian dollar is being undermined by low oil prices which exacerbate the impact of the discount of Western Canada Select on government revenues and the currency outlook. Prices are under pressure from rising U.S. production and inventories. On Tuesday, the American Petroleum Institute reported a 3.45-million-barrel increase in crude stocks and the Energy Information Administration (EIA) data today is expected to confirm the rise. The annual general meeting of the Organization of the Petroleum Exporting Countries is set for December 6, in Vienna. The cartel is expected to announce new production cuts to shore up prices. However, the cuts may not happen unless Saudi Arabia can wrangle support from other producers.
FX traders are looking for guidance from U.S. Federal Reserve Chair Jerome Powell today. Yesterday, Vice Chair Richard Clarida was mildly dovish when he emphasized that the Fed was data-dependent and not on a set path. Traders will be expecting Powell to confirm Clarida’s view which may lead to some U.S. dollar selling as risk sentiment improves.
This morning, US Q3 GDP is expected to rise to 3.6% from 3.5% last month. However, traders will take their direction from Wall Street moves. There aren’t any Canadian data released today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
