The Canadian dollar is closing out the week a tad worse for wear, and it is due to factors beyond its control. The currency has been whipped about by lightning-quick shifts in global risk sentiment arising from Washington, Beijing and the U.K., alongside top-tier G-10 economic data.
The Canadian dollar and British pound were the only currencies to gain against the U.S. dollar overnight. The Australian dollar was unchanged and the rest lost ground. JPY and CF weakened as risk aversion fears eased.
It has been a choppy week. U.S. President Trump caused a hoopla in financial markets on August 13. He said the imposition of 10% tariffs on many Chinese goods scheduled for September 1 would be put off until December 15. According to the Office of the Trade Representative, some of the products impacted by the delay included cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing. Some analysts believe Trump blinked. They think he toned down his rhetoric because China didn't seem fazed by his antics.
Also, the tariffs were negatively impacting manufacturers, retailers and consumers. A few months ago, the New York Fed posted a study that claimed U.S. tariffs added $831.00 in costs to the average household.
Other analysts believe the tariff delay was another "carrot" in Trump's "carrot and stick" approach to the trade negotiations. Whatever the reason, the news turned riskoff sentiment on August 12 to risk-on sentiment on August 13. The Canadian dollar sank on Monday and rallied on Tuesday but took a turn for the worse on Wednesday.
Trump was quiet later in the week, so traders focused on economic data, and they didn't like what they saw. Weaker-than-expected China Retail Sales and Industrial production data got analysts talking about slowing global growth and an increased risk of a recession in some regions.
They got even more nervous after German Q2 Gross Domestic Product rose just 0.4% q/q compared to 0.7% q/q previously. The negative sentiment fueled selling of EUR/USD, which undermined the Canadian dollar, at the same time.
Things got worse after the U.K. posted Brexit-defying, better than expected Consumer Price Index and Producer Price Index reports. GBP/USD soared which fueled EUR/GBP selling, exacerbating the euro selloff. The bond yields, which were already soft, started to fall and the yield curve inverted. That is when U.S. 10-year Treasury yields drop below that of the U.S. two-year Treasury yield. According to the Federal Reserve Bank of San Francisco which said every recession since 1955, was preceded by a yield curve inversion.
The news wreaked carnage across financial markets, although the impact on FX traded was minimal. Nevertheless, the Canadian dollar traded with a negative bias.
Yesterday, U.S. economic data was mostly better than expected, led by a robust jump in July Retail Sales and the Philadelphia Fed Manufacturing Index. The data served to ease U.S. recession fears and provided support for US Treasury yields. The Canadian dollar finished close to unchanged compared to where it started the day.
Today, the only data of note is the Michigan Consumer Sentiment Index.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
