The Canadian dollar is pressing up against its last line of support. In USD/CAD terms, the level is $1.3540. A decisive break to the top will extend gains to $1.3790, a level last seen in May 2017. The Canadian dollar has been buried under an avalanche of bad news but could get a bit of a reprieve today if Canada October Gross Domestic Product and October Retail Sales surprise to the upside.
October GDP is expected to rise 0.2%, compared to Septembers decline of 0.1% m/m. Retail Sales should rise 0.4% compared to September's 0.2% increase. The risk is if the numbers disappoint. Weaker-than-forecast data, combined with robust U.S. data could send the Canadian dollar into another tailspin.
The U.S. dollar is in demand because of a shift into risk aversion trades triggered by the global equity market plunge. Wall Street closed deep into the red yesterday led by a 1.99% fall in the Dow Jones Industrial Average. The NASDAQ is flirting with "official-bear-market" territory, all because the Federal Reserve appears to be fixated on its perception of the "neutral rate" and oblivious to the financial market turmoil. Traders were unhappy with the Federal Open Market Committee's (FOMC) decision to raise U.S. interest rates 0.25% on Wednesday, even though it was a widely-expected move. They were even less happy with the Fed's stated plan of raising rates at least twice more in 2019. They reacted by selling stocks.
The U.S. equity market turmoil infected Asian and European markets. The major indices in those regions have suffered large losses as well. Those markets are also very concerned with the state of the U.S./China trade talks. New discussions are scheduled for January, but the U.S. may have put those talks in jeopardy. The Americans, along with 12 other countries which include Canada, Britain, Japan and Germany have accused China of state-sponsored technology theft which China has denied.
Oil prices have been in free-fall for the past week despite the Organization of the Petroleum Exporting Countries and Russia’s best effort to shore up prices. On December 6, they announced new crude oil production cuts of 1.2 million barrels per day. Alberta announced productions cuts of 375,000 bp/d as well. At the same time, a major Libyan oil filed went offline. WTI oil prices climbed but could not gain any traction above $55.00 U.S./b. That’s because the U.S. was pumping record amounts of oil. The Energy Information Administration and the International Energy Agency warned that rising U.S. production and slowing global growth, exacerbated by U.S./China trade tensions could lead to an overabundance of oil in 2019 as demand shrank. The drop in oil prices triggered widespread selling of Canadian dollars and spooked the Bank of Canada (BoC) as well.
The BoC reversed there hawkish monetary policy outlook from October to a dovish stance in December, blaming falling oil prices for threatening to lower domestic growth.
The FX impact from today’s U.S. and Canadian data will fade rapidly as traders scramble to leave early to get a head start on their Christmas vacations.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
