The Canadian dollar is consolidating its gains from Friday but traded in a narrow range in a quiet overnight session. Japanese markets were closed and will be for the next five days for what is known as "Golden Week." FX markets feel the loss of Japanese liquidity and ranges are usually quite narrow.
The Canadian dollar is still on the defensive because of the Bank of Canada’s shift to neutral. The bank removed any reference to raising interest rates in the monetary policy statement last week. It was not alone. The Reserve Banks of Australia and New Zealand have already adopted a dovish stance as have the Bank of Japan, the European Central Bank, Sweden’s Riksbank and the U.S. Federal Reserve.
The U.S. dollar closed out last week with tiny losses after releasing a better than expected Gross Domestic Product report. The upside surprise to U.S. growth alleviated concerns that a recession was looming which put the global growth outlook in a better light. Continued progress around the U.S./China trade talks helped which gave the Australian, New Zealand and Canadian dollars a lift. U.S. Treasury Secretary Steven Mnuchin said that the trade talks were on the "final lap" which supported the view that a deal would be reached. It is far from a certainty as the U.S. administration is going out of its way to antagonize China. The U.S. Navy sent warships through the Strait of Taiwan on the weekend. The White House told Beijing that it wouldn’t offer a "winding down" period on imports of Iran oil. Countries are vulnerable to U.S. sanctions if they import Iran crude after May 1.
The stage is being set for a busy week. The Federal Open Market Committee (FOMC) meeting is May 1, followed by the Bank of England monetary policy meeting May 2. It is also U.S. nonfarm payrolls week, and that data is due on Friday. Month-end portfolio re-balancing flows could be a factor on Tuesday. Canada February GDP is due tomorrow and forecast to rise 0.1%, a touch weaker than January’s 0.3% gain.
The Bank of Canada didn’t do the Canadian dollar any favours last week, and neither did oil prices. The BoC downgraded its GDP growth outlook for the third time in as many quarters. The WTI oil price rally stalled at $66.53 U.S./b last week and prices have slid to a low of $62.54 overnight. Canadian dollar traders have ignored both the upticks and downticks in prices recently.
There isn’t any shortage of bearish longer-term outlooks for the Canadian dollar. Analysts cite divergent U.S. and Canada economic growth trajectories, widening U.S. and Canadian interest rate differentials and bearish Canadian dollar technicals to justify forecasts for a 71.5-cent Canadian dollar. (vs USD)
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
