The Canadian dollar wins the 2019 "Best-performing currency award." That prize is in the major G-10 currency category when compared to the U.S. dollar. The loonie gained 4.4% from where it opened in Toronto on January 2, 2019, to where it opened today (as of 6:30 am EST). The British pound was in second place, gaining 4.0% for the year and the Australian dollar is finishing unchanged. The euro was the only currency to lose ground, falling 1.9%, undermined by weak economic growth and low interest rates.
The Canadian dollar strength was due to many factors. Chief among them was the Bank of Canada’s (BoC) shift from a dovish to neutral monetary policy stance. The BoC was widely expected to cut the overnight rate at its October meeting. It didn’t. Officials even admitted that they discussed an "insurance" rate cut, but decided to stay the course. Despite somewhat mixed messages from the BoC Governor Stephen Poloz and Deputy Governor Carolyn Wilkins following that meeting, analysts determined the shift in the central bank’s bias, which was confirmed at the December meeting. The reduced risk of lower domestic rates underpinned the currency.
Canadian economic reports provided another layer of support. As of November, Canada added 293,000 new jobs compared to a year earlier, and most of those jobs were full-time. Canadian consumers appeared to keep their wallets closed in the second half of the year with Retail Sales growth averaging an anemic 0.67% since July. The domestic housing market has rebounded since March, following the stress-test induced slowdown that started in 2018. Canadian inflation is at the BoC’s target, which reduced the need for monetary stimulus.
Oil price gains were another pleasant surprise for the Canadian dollar, although the impact was subdued. Alberta’s benchmark crude oil export, Western Canada Select, (WCS) trades at a substantial discount ($22.08, as of December 19) to West Texas Intermediate because of transportation constraints. That discount reduced the Loonie’s oil price benefit.
The loonie benefited from external influences as well. The Phase 1 U.S./China trade deal improved the 2020 outlook for global growth which led to broad selling of the U.S. dollar against the so-called "riskier assets." The U.S. dollar index (USDX) peaked in October and has since shed 3.24%.
FX trading ranges were rather wide, exacerbated by last-minute, U.S. dollar selling for month-end and year-end portfolio rebalancing reasons in thin, holiday markets. The Canadian dollar climbed steadily since the European open. USD/CAD dropped from $1.3051 to $1.3013 in early Toronto trading.
Today’s U.S. data, including Case-Shiller Home Price Index and Consumer Confidence, will be ignored. U.S. Bond markets close early, and FX traders will want to get an early start on New Year's Eve festivities.
