The Canadian dollar outlook turned bearish overnight. USD/CAD broke above key resistance in the $1.3250-70 area, which suggests there will be further weakness ahead, according to short term technical analysis.
The Canadian dollar is being undermined by external factors, including falling oil prices, the U.S./China trade war and easy monetary policies. The major G-10 central banks are slashing interest rates to combat slowing economic growth. The Reserve Bank of New Zealand (RBNZ)made an aggressive move overnight, slashing the Overnight Cash Rate (OCR) by 50 basis points from 1.50% to 1.00%. Markets were surprised as they only expected 0.25 b cut.
The RBNZ noted that "heightened global uncertainty was reducing investment and suppressing trading-partner growth. This highlighted the risk of a larger or more prolonged slowdown in global economic growth." NZD/USD plunged, falling from $0.6556 to 0.6380 before trading back to $0.6430 in Toronto.
Interest rate cuts by the RBNZ, U.S. Federal Reserve, Reserve Bank of Australia, and heightened speculation of renewed quantitative easing by the European Central Bank, is taking a toll on the Canadian dollar. Analysts are wondering how long the Bank of Canada can stay on the sidelines before it is forced to follow suit. Canadian economic growth is recovering after the slow start at the beginning of the year, and the BoC would be loathe to have the recovery interrupted by a resurgent Canadian dollar.
FX markets are nervous. President Trump and the U.S. Treasury Secretary’s declaration that China is a "currency manipulator" was another escalation in what is becoming a prolonged U.S./China trade war. China denied the accusation and retaliated by suspending imports of American agricultural products.
The White House tried to dial back the trade drama. Yesterday, Trump’s economic advisor Larry Kudlow said that the Americans still expected to hold another round of trade talks in September. Risk aversion sentiment eased slightly on the news which helped Wall Street stocks to rally but not enough to fully recoup Monday’s losses.
Oil prices are trading with a negative bias. The escalation of the U.S./China trade war and rising fears of a deeper than expected global economic growth slowdown, more than offset the Organization of the Petroleum Exporting Countries and Russia’s production caps. West Texas Intermediate (WTI) prices broke support in the $53.30-50/barrel area which if sustained, set the stage for a steeper drop to the $50.00/b area.
The drop in oil prices helped to drive the Canadian dollar above USD/CAD resistance at $1.3250, which suggests further gains to $1.3400.
Traders are looking ahead to the Ivey Purchasing Managers Index data today and Friday’s Canadian employment report. There are not any U.S. economic releases of note available today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
