The Canadian dollar came under renewed selling pressure on Friday, and it didn’t abate in Asia or Europe overnight. Friday’s pressure stemmed from weaker-than-expected Canadian Retail Sales data which showed a drop of 0.3% in January, rather than the 0.4% increase which was forecast. Even worse, December’s result was revised lower. Fortunately, a modestly higher inflation reading helped ease the pain from the Retail Sales data, but not enough to prevent another slide in the currency.
The Canadian dollar was also a victim of broad "risk-aversion" sentiment. Markets were focused on news that the 3-month U.S. Treasury yield fell below the 10 year Treasury yield, a which some analysts regard as a signal of an imminent U.S. recession. The U.S. dollar surged against the major G-10 currencies, undermining the Canadian dollar in the process. Other analysts are not convinced that this yield curve inversion is an accurate indicator of a recession. Economists at Royal Bank of Canada point out that a lot of U.S. Treasuries are owned by foreigners, suggesting the inversion may be a better indicator of the global economy, not necessarily that of America.
Reuters quoted former Fed Chair Janet Yellen saying "the U.S. Treasury yield curve may signal the need to cut interest rates at some point, but it does not signal a recession."
Asia equity markets were hammered, led by a 3.01% plunge in Japan’s Nikkei 225 index which followed in the footsteps of a 1.77% drop in the Dow Jones Industrial Average on Friday. European bourses are in negative territory, and U.S. equity futures point to a lower open on Wall Street today.
The Canadian dollar was undermined by a plunge in West Texas Intermediate oil prices on Friday which dropped from $60.05 U.S./barrel to $58.30 U.S./b. The climbed to $59.13 U.S. overnight but have slipped down to $58.77 U.S./b in early Toronto trading. The oil price drop added to the negative Canadian dollar sentiment.
The Federal Budget tabled last Tuesday was another cause for concern for Canadian dollar traders. The government's decision to increase deficit spending led to Fitch Ratings, speculating on the validity of Canada’s AAA bond rating. Fitch wrote, "Canada's gross general government debt, combining federal and provincial fiscal accounts, is higher than other 'AAA' rated sovereigns, excepting the U.S, and remains close to a level that is incompatible with 'AAA' status."
They went on to say, "While the budget is broadly in line with earlier trends, the preference for continued deficits and increased program spending over fiscal consolidation could increase the vulnerability of public finances to a faster economic slowdown or sudden shock."
There aren’t any notable Canadian economic reports available today while the U.S. data is second tier, suggesting equity markets will drive currency direction.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
