The Canadian dollar is trading with a negative bias, even after last Friday’s stellar employment report. Canada added 94,000 jobs in November, 89,000 of which were full-time. FX traders reacted predictably and bought Canadian dollars, aggressively. However, the gains did not last. The currency came under significant pressure from a variety of sources and yesterday’s plunge fully retraced all of Friday’s gains, and then some.
Canadian dollar traders are confused, in part, because the Bank of Canada (BoC) is confused. In October, the BoC trumpeted a bullish Canadian economic outlook. It talked about an economy operating near full capacity, rising inflation rates and anticipated additional growth because of the new United States Mexico Canada Agreement on trade.
A month and a half later, BoC governors sounded pessimistic. They were worried about rising global trade tension acting as a drag on global economic growth. They were very concerned about the impact of low and falling crude oil prices on Canada’s economy and the Federal government’s finances. That dovish flip-flop overwhelmed the positive sentiment from the employment data.
The Organization of the Petroleum Exporting Countries (OPEC) met last week and decided to trim its crude production by 1.2 million barrels per day to shore up oil prices. West Texas Intermediate (WTI) soared when the news broke, but those gains were erased shortly afterwards because of rising global trade tensions. Yesterday’s plunge in WTI prices helped to fuel (pardon the pun) the Canadian dollar slide.
U.S./China trade tensions are at elevated levels. Last week, the U.S. Justice Department asked Canada to arrest the Cfo of Huawei. Canada complied and faced the wrath of an irate China, which accused Canada as being a "lap-dog for American interests" and threatened severe consequences if the CFO wasn’t released. The White House is spinning the story as a separate issue and not related to trade. FX markets are skeptical about the claim and fear a deterioration in the trade talks would lead to a severe drop in global growth expectations.
The trade war fears and China’s actions against Apple led to a steep drop in the U.S. stock market yesterday morning, which exacerbated the Canadian dollar slide. The slide was halted in the afternoon when Wall Street recovered and closed in positive territory. Nevertheless, Wall Street jitters will keep risk aversion trades in demand.
Risk aversion was on full display yesterday after U.K. Prime Minister Theresa May cancelled the scheduled parliament vote on her Brexit plan. The steep drop in GBP/USD which followed spooked FX traders everywhere and they scrambled to buy greenbacks. The Canadian dollar sank as it was collateral damage.
There aren’t any notable U.S. or Canadian economic data available today, suggesting FX markets will continue to consolidate.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
