The Canadian dollar continues its downward trend, with no support from oil prices. West Texas Intermediate oil was $54.30 U.S./barrel two weeks ago. Yesterday it touched $60.35/b. That 11.1% rally hasn’t provided any relief for the Canadian dollar. Currency price movements have de-correlated from oil price movements this week.
The FX market focus is on the U.S. Federal Reserve and what the shift from very hawkish to very dovish monetary policy in just three months means for the dollar and G-10 currencies. In December, the Federal Open Market Committee (FOMC) was predicting three rate increases in 2019. In March, it didn’t forecast have any rate hikes. Economists and analysts are scratching their heads over this development. The Fed expected Q1 weakness followed by a recovery in Q2.
The available data may have been skewed by the lingering impact of the U.S. government shutdown. At the same time, the European Central Bank (ECB) was expected to begin normalizing monetary policy in 2017. That never happened, which precipitated a slow grind higher in the greenback. The U.S. dollar rally since the Wednesday’s FOMC meeting may be a sign that FX markets believe the U.S. economy will outperform that of the euro-zone and other G-10 markets. The Canadian dollar is collateral damage in that environment.
President Trump continues to undermine the Fed’s authority. He complained that the Fed’s monetary policy prevented the US economy from growing at 4% in 2018
The Canadian dollar also suffered from a minor bout of risk aversion arising from concerns around the U.K. Brexit. The British plan for an orderly exit from the European Union is in disarray, in part because they don’t have a plan that MP’s like. Prime Minister Theresa May asked the EU for a three-month extension to Article 50 yesterday. It was denied. Instead, the EU said the British have until May 22 to decide, and only to April 12, if the MP’s reject Ms May’s Brexit plan for a third time at next week’s vote.
Brexit and weak German and euro-zone manufacturing Purchasing Managers Index data this morning knocked EUR/USD lower and that U.S. dollar demand underpinned USD/CAD. The soft data goes a long way in endorsing ECB President Mario Draghi’s view that the euro-zone still needs plenty of stimulus.
Canadian dollar traders are looking ahead to this morning’s Retail Sales and inflation reports. January Retail Sales are forecast to rise 0.4% and ex-autos 0.2%. However, there is a risk of weaker than expected data due to lower gasoline prices and slower auto sales. February CPI is expected to be unchanged at 1.4%, y/y.
Today’s U.S. data includes Existing Home Sales and Markit Manufacturing PMI data.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
