USD/CAD - Canadian Dollar Rallies with Improved Risk Tone

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The Canadian dollar rallied on Friday and added to those gains in overnight trading. It was not alone. The U.S. dollar was sold across the board against the major G-10 currencies following the vastly-better-than-expected U.S. employment data. Non-farm payrolls rose 312,000 and helped to eradicate concerns that the U.S. economy was slowing. Even better, there were upward revisions to the previous two reports.

Canada’s employment report was also released. Canada added 9,300 new jobs in December. The result was better than the 5,000 that was forecast, but the news was lost in the euphoria of the U.S. job gains.

The improved market risk tone was fueled by news that China and the U.S. would reopen trade talks beginning today. Earlier today, a Chinese government spokesman said his government had "the good faith, on the basis of mutual respect and equality, to resolve the bilateral trade frictions".

However, Fed Chair Jerome Powell gets credit for the turnaround in sentiment. Powell appeared to adopt a more dovish tact in his remarks on Friday compared to his tone after raising U.S. rates on December 18. At the time, the Fed wrote that "some further gradual increases would be warranted.” The stock market plunge from year-end until last Thursday caused Mr Powell to tell markets that central bank officials were "listening carefully" to markets and would adjust policy depending upon how the economy performs. He added, "And particularly with muted inflation readings that we’ve seen, we will be patient."

Those were soothing words for Wall Street traders. They bought stocks, and the Dow Jones Industrial Average closed with a gain of 3.29%, entirely erasing the previous day’s decline. The positive sentiment continued in Asia overnight which all closed higher for the session. U.S. equity futures suggest that Wall Street will open higher.

The China talks and stock market rally powered West Texas Intermediate oil prices higher which in turn gave the Canadian dollar an added boost. USD/CAD dropped from $1.3642 on Thursday to $1.3346 in Asia today. The Canadian dollar consolidated those gains in Europe and in early New York trading today. Oil prices are supported by sentiment that China and the U.S. dollar will resolve their trade differences which would lower the risk of a global economic slowdown. Also, the production cuts by the Organization of the Petroleum Exporting Countries and last week’s news of US crude inventory drawdowns are also underpinning prices.

U.S. Institute for Supply Management Non-manufacturing Purchasing Managers Index and Canada Ivey PMI data are on tap today. The U.S. data is predicted to have a slight dip to 59.0 from 60.7 while the Ivey PMI is expected to dip to 56.8 from 57.2.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians