The Canadian dollar inched higher overnight, lifted by a modest improvement in global risk sentiment. Brexit and China/U.S. trade talks are the major catalysts for FX moves, and Brexit is slowly coming to a head.
GBP/USD traders focused on this weekends "Super Saturday" drama. Prime Minister Boris Johnson planned on bringing his Brexit deal to a vote. His efforts were in vain. Instead, MPs passed an amendment that forced Johnson to send a letter to the E.U. to ask for an extension to the October 31 deadline. GBP/USD crashed at the Asia open, falling from $1.29678 to $1.2876. The retreat didn’t last. U.K. Foreign Minister Dominic Raab suggested the government had enough votes to get Johnson’s deal passed. GBP/USD rallied to $1.3010 in Europe. There is more to come. The Withdrawal Agreement Bill may be tabled today.
The commodity bloc currencies, which includes the Canadian dollar are benefiting from the improved risk sentiment as the risk of a "no-deal" Brexit fades. AUD/USD broke above the July downtrend line with its move above the $0.6830-50 zone. Traders are looking for further gains to $0.7070 supported by hopes for a U.S./China trade deal.
U.S./China trade talks showed signs of progress, but there are still plenty of hurdles ahead. For instance, the World Trade Organization's recent ruling in favour of China over the U.S. led to China asking for $2.7 billion in retaliatory tariffs. At the same time, U.S. complaints of China human rights abuses cast a pall over the trade negotiations.
NZD/USD is tracking AUDUSD, albeit to a lesser degree. Large short NZD/USD positions that get unwound could accelerate gains although expectations for slowing New Zealand growth may cap any rally.
EUR/USD is enjoying the improved risk tone following the Brexit developments. Prices broke above major resistance in the $1.1120 area last week which set the stage for additional gains. The US dollar index (DXY) broke below support at 98.20, which exacerbated bearish U.S. dollar sentiment.
USD/JPY is consolidating recent gains in a 108.30-90 range. The currency pair is underpinned by the unwinding of safe-haven trades, in part because of the, reduced risk of a "no-deal" Brexit. The jump in U.S. 10-year Treasury yields from 1.511% at the beginning of the month to 1.773% in early Toronto trading today fueled USD/JPY demand.
The Canadian dollar is a beneficiary of the broad U.S. dollar weakness. That could change today, if the election results in a Liberal/NDP coalition. The Canadian dollar would sink as the elevated risk of sky-rocketing budget deficits undermines the currency.
Canadian and U.S. economic calendars are empty today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
