The Canadian dollar is consolidating yesterday’s gains. The optimism following the news of the U.S./China trade truce is rapidly fading because of confusion about what the two leaders actually agreed. President Trump said China would remove tariffs on U.S. cars, and substantially increase imports of agricultural, energy and industrial products from America. China’s official statement is a lot vaguer and doesn’t mention any specifics. There is a ninety-day delay in the imposition of new tariffs. U.S. Trade Representative Robert Lighthizer will lead the U.S. trade talks suggesting a risk of plenty of headline-driven FX moves.
The Canadian dollar is benefiting (somewhat) from the plunge in U.S. Treasury yields since Monday. The 10-year Treasury yield fell from 3.04% to 2.94% overnight. Traders are worried that Federal Reserve Chair Jerome Powell and the Federal Open Market Committee (FOMC) have adopted a more dovish stance to monetary policy. Many analysts have pared their 2019 U.S. rate hike forecast from four to two.
That is good news for the mandarins at the Bank of Canada. (BoC) The BoC is expected to raise rates in January. If the Fed is not raising interest rates aggressively, the BoC will not be under pressure to match the moves. Last Friday’s weaker-than-expected Canadian Gross Domestic Product report likely eliminated the risk of a rate hike tomorrow.
The Canadian dollar got an added lift from news that Saudi Arabia is leaning on other members of the Organization of the Petroleum Exporting Countries to agree to another 1.3 million barrel per day oil production cut. Russia is reportedly pushing back due to the size of their contribution. The news is expected to be announced on December 6. Alberta is following in OPEC’s footsteps. The land-locked province is awash in crude, producing far more oil than it can ship due to pipeline and rail car constraints. (there isn’t enough of either). Alberta Premier Rachel Notely imposed production cuts of 325,000 barrels per day on the industry. She said it was needed to alleviate the over-production. It had the bonus of lifting the price of Western Canada Select, Alberta’s main crude export.
The Alberta production cut is not good news for Canadian GDP growth. Bank of Montreal economists suggest it will result in a 1.25-1.5% drop in Q1 GDP, annualized. The duration of the Alberta cuts is key. If they are just temporary, the impact will diminish.
There are not any economic data releases of note from Canada or the U.S., leaving FX traders to take direction from Wall Street and the bond market.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
