The Canadian dollar is getting stronger and has almost fully recouped all of its losses from its January 7 gulch. However, it needs to rally a lot further in order to break the bottom of the USD/CAD range of $1.3180-$1.3380 which has contained price action since the first full week of trading in 2019. It could happen.
The Canadian dollar opened in Toronto on a positive note, supported by a mildly improved risk tone which lifted the commodity bloc currencies. EUR/USD and USD/JPY were unchanged. The British pound managed to recoup some of yesterday afternoon’s losses. GBP/USD plunged from $1.3173 to $1.3067 after series of Brexit votes in the British House of Commons. When the dust settled, Prime Minister Theresa May was given a mandate to renegotiate the Irish backstop agreement with the European Union. Senior E.U. officials said that the existing agreement was binding and they would not reopen talks. That stance is likely to change as it is in the E.U.’s interest to avoid a no-deal Brexit as well.
The Canadian dollar firmed because of broad demand for commodity bloc currencies. The Australian dollar soared overnight. Australian inflation data was higher than expected which downgraded risks of the Reserve Bank of Australia (RBA) cutting rates. AUD/USD is deriving additional support from a shift in expectations around the U.S./China trade negotiations. U.S. Treasury Secretary Steven Mnuchin expressed optimism for a positive resolution to the talks, suggesting that if China offered enough concessions, the U.S. would remove all the tariffs. On the other hand, China may be less motivated to offer anything if it believes the arrest of the Huawei CFO is blackmail. Reports that China Vice Premier Liu He will meet with President Trump is seen as another sign of optimism for the talks.
The Canadian dollar is also underpinned by anticipation for a dovish U.S. Federal Open Market Committee (FOMC) statement today. Chair Jerome Powell reversed his somewhat hawkish message in his December 21 press conference two weeks later after carnage on Wall Street. His remarks since January 4 echoed those of his FOMC colleagues who were preaching that the Fed would be patient and flexible. Markets expect that theme to play out again this afternoon. Arguably, the prospect of a dovish Fed is priced into currencies which may limit additional gains.
The Canadian dollar is also supported by the 5.2% rally in oil prices since yesterday morning. West Texas Intermediate (WTI) climbed from $51.30/barrel on Wednesday to $53.96/b overnight. The rally was fueled by the U.S. sanctions against Venezuela which are expected to impact supplies.
The Canadian dollar rally could run into headwinds tomorrow if November Gross Domestic Product data proves worse than expected. There isn’t any domestic data available today, and the U.S. data will be overshadowed by the FOMC statement.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
