The Canadian dollar soared yesterday and continued to climb in overnight trading. Prices crashed through major resistance levels, and they appear to have more upside ahead, although new gains may be in a less dramatic fashion.
The Federal Open Market Committee (FOMC) left U.S. interest rates unchanged as was almost universally expected. However, the degree of dovishness in the tone of the statement was not. That dovishness knocked the U.S. dollar for a loop, and it fell dramatically against all the major G-10 currencies. The Canadian dollar has climbed an impressive 1.5% since yesterday’s Toronto opening level.
The FOMC left U.S. interest rates unchanged at 2.25-2.50% and downgraded its economic assessment from "solid" to "moderate." The statement showed some dissension in the ranks as the vote was not unanimous. St Louis Fed President James Bullard voted to cut rates immediately. The dot-plot forecast showed that almost half of the Committee members expected lower rates in 2019.
They aren’t the only ones. The market has fully priced in two rate cuts in 2019, and Goldman Sachs economists suggest those cuts will occur in July and September.
Fed Chair Jerome Powell admitted in his press conference that the Fed had made significant changes to the statement. He blamed a resurgence of cross-currents for the changes, saying that concerns the Fed thought were fading reasserted themselves. One of the Fed’s biggest concerns was the deterioration in the trade outlook between the U.S. and China.
The Canadian dollar got an added lift from better-than-expected domestic inflation data and a surge in West Texas Intermediate (WTI) oil prices. Canada May Consumer Price Index surprised to the upside, rising 2.1% year over year, which beat the forecast for a 2.0% gain. More importantly, Core CPI rose 2.4%. The rise in inflation supports the Bank of Canada’s baseline outlook that the domestic economy would recover in the second-half and diminishes the risk that the BoC would lower interest rates.
The 9.6% rise in WTI prices since last week has provided another layer of support to the Canadian dollar. Traders ignored yesterday’s Energy Information Administration (EIA) report that U.S. crude stocks decline in the previous week. Instead, the focused on reports that the China/U.S. trade negotiations would resume after President Trump meets with Chinese President Xi Jinping at the Osaka G-20 meeting on June 28-29. The prospect that a trade deal would reinvigorate global economic growth, spurring oil demand, underpinned prices. Furthermore, the meetings between the Organization of the Petroleum Exporting Countries and non-OPEC nations at the beginning of July are expected to result in an extension to the existing production cuts, adding to the price support.
The Fed statement overshadows today's U.S. data, making it a non-event
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
