The Canadian dollar is trading in a barrel of oil. For the last few weeks, the loonie has assumed the mantle of "petrocurrency," rising and falling in tandem with West Texas Intermediate (WTI) oil price swings. Those swings have been rather dramatic lately.
Yesterday, WTI traded at $55.65 U.S. in Europe and USD/CAD traded at $1.3085. When oil prices dropped to $53.48/barrel during the Toronto session, USDCAD soared to $1.3148. The Canadian dollar recovered in tandem with another uptick in crude prices.
The renewed crude and Canadian dollar correlation is due, in part, to the January Bank of Canada policy statement. The BoC warned that low oil prices would have a negative effect on domestic growth and income which is part of the reason for its dovish outlook. When oil prices rise, traders anticipate an improvement in the domestic economic outlook which suggests the BoC could revert to a less dovish stance.
However, oil prices are the only issue driving Canadian dollar direction. Traders are focused on a host of other issues including the U.S. Federal Reserve monetary policy, U.S. and China trade talks, European Central Bank forward guidance, Brexit and today, President Trump’s State of the Union address to the nation.
Trump is expected to talk about infrastructure spending, the border wall, trade and the prospect of another government shutdown. The Democrats hope to direct attention to themselves which could force Trump off-script, which is why FX traders are staying close to home today.
Fed Chair Jerome Powell met with Trump yesterday. The Fed’s press release said, "At the President's invitation, Chair Powell and Vice Chair Clarida joined the President and the Treasury Secretary for an informal dinner tonight in the White House... to discuss recent economic developments and the outlook for growth, employment and inflation." It went on to say that Powell’s comments were consistent with his remarks at his FOMC press conference last week,
FX traders are concerned about collateral damage if the U.K. exits the European Union without a deal. U.K. Members of Parliament decisively rejected Prime Minister Theresa May’s original plan, and she is hoping to renegotiate with the E.U.. The E.U. said they are not interested in a renegotiation which has weighed on sterling. A hard Brexit could spark demand for safe-haven trades which would undermine the Canadian dollar.
The latest round of trade talks between China and the U.S. ended quietly but with suggestions of progress including a meeting with President Xi Jinping and Trump. A United Nations trade official warned that if a deal isn’t reached by the March 1 deadline, it would have "massive" implications for the global economy. The news was ignored as it is something that has been said many times before.
Canada's trade report was delayed Tuesday by Statistics Canada and U.S. non-manufacturing Purchasing Managers' Index was the only data reports available today, and not likely to have an impact on trading.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
