The Canadian dollar soared in overnight trading. The currency gained nearly one cent from Friday’s close before slipping in early Toronto trading. The catalyst for the rally was twofold: The U.S./China trade truce and a rebound in crude prices.
The White House announced: "President Trump has agreed that on January 1, 2019, he will leave the tariffs on $200 billion worth of product at the 10% rate, and not raise it to 25% at this time. China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately."
That was better news than what was expected. Traders did not expect much from the President Trump and President Xi Jinping's dinner meeting in Argentina. The story of the trade war truce was a signal for "risk-on." Commodity prices rallied, and commodity bloc currencies did the same, led by the Australian dollar.
The Canadian dollar accelerated higher as well, crashing through resistance and triggering stop-loss buying in the process. The rally gained traction as oil prices climbed.
West Texas Intermediate (WTI) oil prices jumped 6.2% between Friday’s closing level and its overnight peak. They have since retreated but are consolidating gains at elevated levels. Oil price support came after Russia announced that it would support Saudi Arabia and extend production cuts. Canada is also cutting oil production. Alberta plans to reduce output by 8.7%, in part, they are producing far more oil than they can ship. The general meeting of the Organization of the Petroleum Exporting Countries begins on Thursday. Qatar said it was quitting OPEC in January.
The Canadian dollar is still vulnerable. The technical picture supports further gains which could occur on Wednesday if the Bank of Canada delivers a dovish policy statement. The majority of economists and strategists expect the BoC to leave interest rates unchanged at 1.75%. Last Friday, Canada's Gross Domestic Product was a tad below the consensus forecast which led to some economists trimming their 2019 interest rate outlook from four rate increases to just two. The drop in oil prices and the hefty discount for Alberta’s Western Canada Select were contributing factors.
The Trump/Xi trade war truce may have jump-started a shift into riskier assets, but other risks are waiting in the wings. In the U.K., the House of Commons votes for Prime Minister Theresa May’s Brexit deal on December 11. If it fails to pass, Theresa May’s government could fall, and another Brexit referendum could occur. Those risks will keep sterling traders on their toes and lead to GBP/CAD volatility.
Today’s U.S. Institute for Supply Management Manufacturing data is expected to be unchanged and not a factor for markets. Instead, FX traders will take direction from Wall Street which is set to open in positive territory today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
