The Canadian dollar extended its post-Bank of Canada policy statement slide in overnight trading. The loss was marginal compared to where it closed, but it has lost 2.6% against the U.S. dollar this week.
Yesterday, Bank of Canada Deputy Governor Lynn Patterson explained the central bank’s dovish bias. She told an audience in Hamilton that the BoC was surprised by the sharper and more broad-based slowdown in the fourth quarter. Business Investment and Exports were weaker than predicted. She blamed part of the slowdown on uncertainty in the global economy, caused by the U.S. and China trade talks.
Patterson said the mixed picture of the data meant it would take time to gauge the persistence of below-potential growth and its implications for the inflation outlook. BoC now believes that the domestic economy will be weaker in the first half of 2019 than it previously projected but expects economic growth to pick up later in the year.
The dovish BoC policy statement and Patterson’s speech have probably stolen the thunder from this morning's Canadian employment report. Canada is not expected to have added any new jobs in February, in part because of "payback" from January’s blowout 66,800 increase. Also, lousy weather in February may have also played a role. This morning’s report comes too soon after the BoC statement. There may be a brief flurry of FX activity, but the data will quickly be forgotten.
A large part of the Canadian dollar weakness is due to broad U.S. dollar demand against the G-10 major currencies. EUR/USD has shed 3.5% of its value since January 10 as traders re-evaluated their European Central Bank (ECB) outlook. They expected the ECB to start raising interest rates in the summer of 2019 which is what ECB policy statement said would occur. That changed yesterday.
Euro-zone economic data has been weaker than expected which led to the ECB to push out interest rate increases until the end of 2019 at the earliest. They kicked their dovish bias up a notch when they announced new a Targeted Long Term Refinancing Operation. (TLRO-III) The move had been telegraphed, but many traders expected it to be announced at a later meeting. EUR/USD dropped leading to demand for U.S. dollars across the G-10 spectrum.
Global risk sentiment took a turn for the worse overnight. China’s February trade data was far weaker than expected, triggering a bout of risk aversion trading. In addition, China’s benchmark stock market index, the Shanghai Shenzhen CSI 300 plunged 3.7%, exacerbated by what some believe was an "official government" warning against overvalued stocks.
U.S. non-farm payrolls data are due today and expected to show a gain of 180,000 new jobs.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
