The Canadian dollar is in demand. U.S. Federal Reserve Chair Jerome Powell’s testimony to Congress and the Bank of Canada (BoC) interest rate statement and Monetary Policy Report (MPR) delivered a one-two punch to the nose of Canadian dollar bears.
The BoC left interest rates unchanged at 1.75%. No surprises there. The monetary policy statement was somewhat ambiguous. It had fodder for bullish and bearish outlooks, but the initial reaction by Canadian dollar traders was to sell the currency. That sentiment changed upon closer reading of the MPR and during BoC Governor Poloz’s press conference.
The MPR was rather upbeat. The second-quarter Gross Domestic Product forecast got upgraded to 2.3%. The report also noted that improvements in consumption, labour growth, and a more balanced housing market. The MPR also noted positive developments in the oil and gas sector.
However, the China/US trade dispute and China’s "restrictive trade" policies on some Canadian exports, (Canola, Meat products) were a serious concern. The MPR models warned that the Canadian economy would suffer far greater from a negative US/China trade result than it would gain by a positive outcome.
Nevertheless, financial markets concluded that the BoC was neutral and not as dovish as expected. The Canadian dollar rallied and tested significant resistance at the USD/CAD $1.3040 level.
Powell’s Congressional testimony and the minutes from the Federal Open Market Committee (FOMC) meeting of June 19 were key drivers of Canadian dollar demand. Powell is concerned that the U.S./China trade war is restraining domestic growth. He said "In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion."
Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.
The FOMC minutes were more explicit about cutting rates. They said "Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook. Several others noted that additional monetary policy accommodation could well be appropriate if incoming information showed further deterioration in the outlook."
The U.S. dollar came under pressure following Powell’s comments. Selling continued overnight, and it is trading in Toronto lower than where it closed. The Canadian dollar got an added benefit from a surge in Wet Texas Intermediate oil prices after a British Navy ship in the Strait of Hormuz stopped Iranian navy ships from harassing a U.K. oil tanker it was escorting.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
