The Canadian dollar is testing a resistance area that has capped gains since April 30. The Canadian dollar is seeing renewed demand due to broad-based U.S. dollar selling following yesterday’s comments by Federal Reserve Chair Jerome Powell.
Powell said the Fed is closely monitoring the implications around recent developments involving trade negotiations and their implications for the U.S. economic outlook. He added, "as always, we will act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric 2%objective."
Financial markets interpreted this statement as a signal that the Fed is preparing to cut interest rates. It was just nine months ago that markets were fearing two, possibly three Fed rate hikes by the end of 2019. Powell admitted that uncertainty around trade negotiations caused concerns.
Markets expect the Fed to cut interest rates twice in the next seven months. Powell’s signal sparked a huge rally on Wall Street, lifted U.S. Treasury yields and underpinned the Canadian dollar.
It is not all sunshine and unicorns for the Canadian dollar. Domestic data has been reasonably supportive, but Canada is also suffering from the impact of trade U.S./China trade restrictions, according to Bank of Canada Senior Deputy Governor Carolyn Wilkins. In a speech in Calgary
last week, she noted that domestic inventories were rising.
She noted that Canada was caught in the crossfire between China and the U.S. She also warned that if the disputes "were to worsen
and become long-lasting, the outlook would be quite different. Not only would we see weaker economic demand, but the supply side of the economy would also take a hit as companies deal with disruptions to their supply chains."
Those concerns combined with fresh rate cuts from central banks in Australia, New Zealand alongside dovish outlooks from the European Central Bank have given rise to speculation the Bank of Canada could cut interest rates this year.
Those fears are reinforced by the dovish shift by the Fed and recent oil price weakness. The escalation of China/U.S. trade tensions raised fears of a global growth slowdown which would more than offset Organization of the Petroleum Exporting Countries production cuts. Also, OPEC is debating extending the current production cut levels past the end of June.
Reportedly, Russia is one country that is against an extension.
The U.S. dollar finished yesterday’s session with losses across the board and it extended those losses in overnight trading. Comments from Reserve Bank of New Zealand Assistant Governor Hawkesby underpinned NZD/USD while mixed economic reports supported EUR/USD. GBP/USD was lifted by better-than-expected May Services Purchasing Managers' Index data.
Today’s U.S. economic reports include ADP Employment and ISM non-manufacturing PMI. There aren’t any Canadian data.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
