An undercurrent of risk aversion sentiment is rippling through markets, and it is weighing on the Canadian dollar. Wall Street stocks were hammered yesterday after China retaliated to U.S. tariffs by announcing tariffs on US goods. An article in a Chinese newspaper suggested that in addition to tariffs, China could cancel Boeing contracts or even worse, start unloading some of the $1.1 trillion worth of U.S. Treasury bonds that China owns. That story unnerved traders, and they scrambled to sell stocks while gravitating to the traditional "safe-haven" currencies. The Japanese yen and Swiss franc were the only G-10 major currencies to post gains against the U.S. dollar. The Canadian dollar and the Antipodean currencies were sold.
The equity market selloff in New York spilled into the Asia session. Hong Kong’s Hang Seng Index and Australia’s S&P/ASX index were the worst performing markets. USD/JPY dropped alongside the stock market but recouped those losses into the European open and is trading in Toronto at its overnight peak. The currency pair was supported by a small bounce in U.S. Treasury yields.
In Europe, EUR/USD was underpinned by rebounding equity markets, higher Treasury yields but gains were slowed when the German ZEW Economic Sentiment Index was just 2.1 rather than the 5.0 forecast. EUR/USD continues to trade with a mildly bid tone, albeit inside a narrow $1.12230-$1.1243 band.
GBP/USD plunged from $1.3038 yesterday to $1.3024 overnight on a mix of negative Brexit sentiment and risk aversion U.S. dollar buying. U.K. Prime Minister Theresa May continues to work toward getting Labour onside with her Brexit plan, without making much progress.
The Canadian dollar is only deriving minimal support from firm oil prices. West Texas Intermediate (WTI) plummeted from $63.25 U.S./barrel on Monday to $60.72/b during the European session. Oil prices were knocked lower when traders determined that the downside risk to global growth and therefore oil demand from an escalation in the U.S./China trade dispute was a more significant factor than the potential supply disruption caused by Iran and U.S. tensions. That sentiment changed overnight when explosive-laden drones attacked a Saudi Aramco pumping facility. WTI rebounded to $61.82 in early Toronto trading.
US/China trade war headlines will dominate markets again today due to a lack of actionable, top-tier U.S. economic data. Arguably, Trump’s tweets and Chinese newspaper articles are just grandstanding while the negotiating teams continue their work. The new U.S. and Chinese tariffs do not go into effect until sometime in June. On Monday, U.S. President Trump was talking about new trade insight being available in three to four weeks. Also, he is supposed to meet with Chinese President Xi Jinping at the G-20 meeting in June.
There isn’t any Canada or U.S. data of note available today, leaving Wall Street moves to drive direction.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
