Oil prices turned higher overnight and in turn, underpinned the Canadian dollar. West Texas Intermediate, the North American crude benchmark surged to $57.48 U.S./barrel from last nights closing price of $57.08. The rally was on the back of the latest American Petroleum Institute (API) data showing that crude inventories declined 2.58 million barrels per day in the week ending March 8.
Oil prices are also supported by yesterday’s Energy Information Administration forecast of slower U.S. crude production in 2019, combined with Venezuela shipment disruptions and Saudi Arabia’s earlier promise to cut crude production to seven million barrels per day in April.
The rise in oil prices attracted new Canadian dollar demand which was already being bought after last week’s sell-off ran out of steam. The failure of the Canadian dollar to extend losses above the USD/CAD level of $1.3460 led to a bit of profit-taking. Canadian dollar buying became more pronounced yesterday after the American’s recorded a lower than expected inflation reading. Broad U.S. dollar selling against the G-10 major currencies boosted the Canadian dollar by default.
However, the Canadian dollar's gains may be short-lived. The Bank of Canada admitted being surprised about the weakness in the domestic economy seen in Q4 and downgraded its forecast for economic growth in Q1. In January, many economists predicted two interest rate increases in Canada in 2019. After the March 6 BoC monetary policy statement, those economists reduced their interest rate hike forecasts. They now expect only one rate hike and not until the end of 2019 or early 2020.
The BoC’s dovish policy stance is in line with many of the G-10 central banks and the absence of top-tier domestic economic reports, leaves Canadian dollar direction tied to general U.S. dollar sentiment.
The overnight FX activity was choppy and dominated by British pound trading. GBP/USD dipped and then soared, rising from $1.3062 to $1.3160 in early Toronto trading due to Brexit issues. U.K. Prime Minister Theresa May tabled a revised version of her plan to take the United Kingdom out of the European Union. Her first attempt, on January 15, was soundly defeated. As it turned out, so was her second try. She lost by 149 votes. Today, the same politicians are voting on a motion that would prevent the U.K. from leaving the E.U. without a deal.
Australian and New Zealand dollar traders were focused on domestic data, and they didn’t like what they saw. Australia Consumer Confidence was lower than expected as was New Zealand Food Price Index. Both currencies were sold in Asia, but they rebound in Europe thanks to broad U.S. dollar weakness.
Traders are looking ahead to this morning’s US Durable Goods Orders, Producer Price Index and Construction Spending data. There aren’t any Canadian economic reports today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
