USD/CAD - Canadian Dollar Counting Down to FOMC Meeting

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The Canadian dollar traded quietly overnight, alongside the rest of the G-10 major currencies. FX traders worldwide are using the event risk stemming from the pending tariff increase on Chinese imports to the U.S., the Federal Open Market Committee (FOMC) policy meeting today, and Thursday’s U.K. election, as excuses to stay on the sidelines.

The FOMC meeting should be uneventful. Fed Chair Jerome Powell recently noted that the U.S. economy was in "a good place." The surprisingly robust non-farm payrolls report released on December 6 validates that view. The Fed suggested that it was in "wait-and-see" mode after the last meeting. As the decision to go ahead with a December 15 tariff increase is still up in the air, waiting to see continues to make sense. The benchmark Fed Funds range will be unchanged at 1.75% to 2.0%.

FX traders are also awaiting the results of Thursday’s U.K. election. The British pound traded erratically recently, rising and falling with every poll. That price action was on full display yesterday and overnight. GBP/USD rallied from $1.3135 to $1.3210 following polls suggesting a solid, 68-seat, Conservative majority government. That changed overnight after the release of the latest YouGov poll. It predicted that a Conservative majority of just 28 seats. The high number of undecided voters suggests that a minority government is still a possible outcome. GBP/USD dropped to $1.3109 before bouncing to $1.3145 in Toronto this morning.

The Canadian dollar may be getting a bit of "relief" support after news that the U.S., Mexico and Canada finalized the US-Mexico-Canada Agreement on trade (USMCA). NAFTA is no more. The Americans think they came out ahead with this deal, and they did. The agreement increased the requirement of the parts of a vehicle to be made in one of the three countries to 75% from 62.5%. GM said it has already shifted production of some cars back to the U.S. Labour standards were increased, which hurts Mexico. U.S. dairy farmers get more access to Canada. The Canadian dollar gets a bit of support as the risk that President Trump slaps new tariffs on Canadian goods is significantly reduced.

The seemingly never-ending U.S. and China trade negotiations continue to weigh on FX markets. The U.S. plans to increase tariffs on Chinese imports by 15% on December 15. President Trump said the decision to implement or delay the tariffs is contingent on the progress of a Phase 1 deal. China doesn’t just want the December 15 tariffs delayed; they want all tariffs rolled back. Evens so, officials from both sides say they are "close to a deal."

FX markets are slowly winding down for 2019, which will exacerbate intraday currency moves in the coming weeks. The Canadian dollar will likely remain in a $1.03100-$1.3400 band until year-end.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
Learn how KnightsbridgeFX can help you save up to 2% when buying or selling US dollars compared to your Canadian bank’s rates – click here to compare bank rates