The Canadian dollar is starting 2019 in a bad way. The bearish sentiment that undermined the currency throughout December has not abated. In fact, it has worsened. Oil prices have continued to drop, and equity market turmoil has spooked global investors and confidence in the U.S. Federal Reserve has waned. Also, markets are concerned about the U.S. government shutdown and the ongoing U.S./China trade dispute.
U.S. dollar traders took advantage of the thin holiday markets last week and bought greenbacks against all the major G-10 currencies except for the Japanese yen. GBP/USD dropped because of rising fears of a "no-deal Brexit." EUR/USD tracked sterling lower. The antipodean currencies were weighed down by elevated risk aversion and the U.S./China trade spat. The Japanese yen was the only G-10 major currency to gain last week, and that move was fueled by falling U.S. Treasury yields. Markets are concerned of a U.S. economic slowdown in 2019 and are no longer pricing in U.S. rate hikes. Wall Street traders certainly do. Many believe the Fed outlook is wrong. The Federal Open Market Committee's (FOMC) "dot plot" forecast of two rates increases this year has exacerbated year-end equity market weakness.
The Canadian dollar is suffering from a domestic version of Central Bank angst. Bank of Canada Governor Stephen Poloz flipped from hawkish in October to dovish in December while leaving the door ajar for a January 9 rate increase. Free-falling oil prices may slam that door shut. West Texas Intermediate (WTI) is trading with a negative bias and is at $45.10 U.S./barrel today. Western Canada Select (WCS) trades at a $15.60 U.S./barrel discount. The meager price for Canadian crude may put a damper on any BoC plans to increase rates. The combination of a dovish BoC and a still hawkish Fed continues to weigh on the Canadian dollar.
However, FX price action for the past two or three weeks should be viewed skeptically. December is a notoriously erratic month with large, seemingly random FX price swings. That is because many large FX players close their books for the year, draining liquidity from the market.
Global equity indices sank this morning after a weak China data. The Caixin Manufacturing PMI report was below the consensus forecast and posted 49.7 for December. Forecasters expected 50.1 and noted that a result below 50 suggests that the Chinese economy is contracting. That negative sentiment carried over into Europe. Traders there ignored domestic PMI data, which was mostly as expected, and sold stocks.
There isn’t any market moving Canadian or US economic data today leaving traders to look ahead to Friday’s employment reports.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
