The Canadian dollar is firming. The rally is rather subtle, and it has avoided wild price gyrations usually associated with unexpected economic data results. The Canadian election was a non-event for FX traders who are more focused on economic fundamentals.
Recent Canadian economic reports have been, if not robust, at least favourable. Earlier disappointment from a weak retail sales report was shrugged off as an anomaly due to August holidays. The strength of the Canadian data is giving the Bank of Canada a lot of leeway with its monetary policy. Officials haven’t given any indication that they will change from their neutral policy stance at next week’s meeting, leaving Canadian rates unchanged. That will contrast with the U.S. Federal Reserve. The Federal Open Market Committee is universally expected to lower the range of Fed funds to 1.50-1.75% from 1.75%-2.00%. The divergent monetary policies are giving the Canadian dollar an added lift.
The Bank of Canada released its quarterly Business Outlook Survey (BOS) yesterday. It summarized the report saying, "Results from the autumn Business Outlook Survey indicate that business sentiment improved slightly, but regional differences are more pronounced. Positive views in Central Canada contrast with widespread weakness in the Prairies." The report noted that "Indicators of future sales suggest moderate sales growth ahead. Foreign demand continues to support export sales prospects, though they are being weighed down by trade tensions."
The BOS was mostly positive, which added to the favourable Canadian dollar sentiment, helping to take the sting out of yesterday’s weaker-than-expected wholesale sales report.
Overnight, FX markets traded with a subdued tone. Traders were treading cautiously ahead of this morning’s European Central Bank meeting while others were watching for Brexit developments.
Australia’s Commonwealth Bank Manufacturing Purchasing Managers' Index report was a tad below the September result but a tick higher than forecast. It didn’t provide any new information that would force the Reserve Bank of Australia to change its dovish monetary policy outlook, which undermined AUD/USD. NZD/USD mirrored AUD/USD moves.
The European Central Bank (ECB) left interest rates unchanged. The result was expected, but EUR/USD slipped anyway. The statement said "The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics." It is also ECB President Mario Draghi’s last meeting as his term has ended.
GBP/USD is treading water around the $1.2900 level as traders wait for more information on the government’s Brexit plans. The European Union is not expected to respond to the U.K.’s latest request for a Brexit extension until tomorrow.
Today’s U.S. data, which includes Durable Goods Orders, is unlikely to have a lasting impact on FX markets due to next week’s FOMC meeting.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
