The Canadian dollar lost a little ground overnight. A mild bout of risk-aversion sentiment coupled with a retreat in West Texas Intermediate oil prices contributed to the selling, although the range was relatively narrow.
The loonie came under pressure following yesterday’s domestic inflation report. Canadian Consumer Price Index rose 1.4%, y/y in January which was a tad below the 1.5% expected and 2.0% seen in December. A significant drop in energy prices was a major factor in the December-January CPI decline. In addition, Stats Canada altered the makeup of the basket which also distorted results.
There was a whisper of risk-off sentiment in overnight FX markets. Traders became concerned about the lack of concrete details coming out of the China/U.S. trade talks. U.S. Trade Representative Robert Lighthizer told Congress "we are making progress" but suggested enforceability of the terms was an issue. He wasn’t very impressed with Chinese promises to purchase more agricultural products preferring to see actual commitments. That was enough for traders to buy Japanese yen and Swiss francs, the traditional safe-haven currencies.
Traders may have also been spooked by news that President Trump and Kim Jong-Un ended their summit meeting early.
The Canadian dollar is underpinned by West Texas Intermediate oil prices. WTI oil has rallied 5.1% since the beginning of the month. However, the Canadian dollar has not kept pace with those gains. It has lost 0.26% since February 1. That suggests that WTI will retreat or the Canadian dollar will strengthen.
The Canadian dollar has a lot going for it. The Canadian economy is chugging along, not robustly but keeping its head above water. Bank of Canada Governor Stephen Poloz reaffirmed his commitment to data and the steady rise in WTI prices could lead to a shift in monetary policy from dovish to neutral at next week’s Bank of Canada meeting. On the other hand, the BoC may prefer to stay in the company of the rest of the G-10 major banks which are dovish.
The Canadian dollar has +been undermined by a surge in GBP/USD which has fueled demand for GBP/CAD. Sterling has climbed steadily this week supported by Brexit news. U.K. politicians appear united in their opposition to a "no-deal Brexit." Prime Minister Theresa May is allowing a vote on that option on March 13. There are rumours that Brexit could be postponed for two years. However, it remains to be seen if European officials feel the same way. Most indications are that they don’t.
There is a lot of U.S. data released this morning. Q4 GDP, Jobless Claims, Personal Consumption/Expenditures, and Chicago PMI are on tap.
Canada data includes Current Account and Raw Materials Price Index. Month-end portfolio re-balancing flows may also add to FX volatility.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
