The Canadian dollar was beaten up yesterday and tested support at USD/CAD $1.3340. It held, but subsequent Canadian dollar gains have been shallow, and the currency is vulnerable to renewed selling pressures.
Fresh U.S. trade war concerns, this time with the European Union, and renewed recession fears from a slew of weak economic reports, sparked a steep selloff on Wall Street, yesterday. The Dow Jones Industrial Average fell nearly 500 points, and the S&P 500 dropped 1.79% leading to a broad U.S. dollar retreat. The Canadian dollar fell in sympathy with the greenback as a recession in America is negative for Canada as well.
Canadian dollar selling intensified following the U.S. Energy Information Administration (EIA) data reporting crude inventories rose 3.1 million barrels in the week ending September 27. Traders were spooked by both rising U.S. supply and production even as global economic growth continues to falter. West Texas Intermediate, the North American benchmark price dropped from $55.90/barrel on Monday to $52.27/b overnight, which weighed on the Canadian dollar.
The recession fears drove U.S. Treasury yields and USD/JPY lower. 10-year Treasury yields plunged from 1.74% on Tuesday to 1.572% in early Toronto trading today. USD/JPY fell to 106.88 from Tuesday’s peak of 108.42.
The Canadian dollar has underperformed against the other commodity bloc currencies, AUD/USD and NZD/USD. Those currency pairs rallied on the back of narrowing Australian, and New Zealand interest rate spreads to the US dollar. AUD/USD shrugged off weaker than expected Services Purchasing Managers Index data and a dip in its trade surplus.
Rising hopes that the U.K. could avoid leaving the European Union on October 31 without a deal have underpinned GBP/USD prices. Prime Minister Boris Johnson submitted some proposals to the EU which were not rejected by EU President Jean-Claude Juncker. However, Johnson maintains the U.K. will leave on October 31, "with or without a deal." The EU believes a deadline extension is more likely, and GBP/USD traders do as well, judging by its recent gains. GBP/USD rallied to $1.2324 from $1.2275 in early Toronto trading.
EUR/USD attempted to rally during the European session, but gains were thwarted by weaker than forecast Market Services PMI and Producer Price Index reports. August Retail Sales were unchanged at 0.3% month over month. EUR/USD declined to $1.0942 from $1.0972.
There are many U.S. economic reports on the agenda today. Traders will be focusing on the ISM Services and Composite PMI data. Steady to better than expected results will help Wall Street recoup some of yesterday’s losses and lessen recession risks. The Canadian calendar is empty.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
