The Canadian dollar flirted with resistance yesterday but was unable to make any additional gains. Overnight developments shifted the focus to the downside. U.S. President Trump ordered an air strike just outside Baghdad, Iraq. The Department of Defence press release said: "At the direction of the President, the U.S. military has taken decisive defensive action to protect U.S. personnel abroad by killing Qasem Soleimani, the head of the Islamic Revolutionary Guard Corps-Quds Force, a U.S.-designated Foreign Terrorist Organization."
Oil and gold prices rallied, and Asian equity indices sank on the news
Global markets are worried about how Iran will react to the targeted killing of the General. Fears that crude shipments through the Strait of Hormuz would be disrupted stoked fears of oil shortages, especially after the Organization of the Petroleum Exporting Countries and Russia cut crude production quotas at the beginning of December. West Texas Intermediate soared on the news, rising from $61.17 to $64.05 overnight. Prices have eased to $63.43 in Toronto.
FX markets reacted in a predictable fashion when the airstrike was announced, although the magnitude of the moves may be exaggerated as many market participants are still on holiday. USD/JPY plummeted from 108.62 to 107.92 as the yen is the "go-to" safe-haven currency. AUD/USD and NZD/USD fared poorly as well with AUD/JPY selling exacerbating the AUD/USD move lower.
EUR/USD extended yesterday’s losses, dropping to $1.1126 from $1.1177 before rebounding to $1.1142 in Toronto trading. EUR/JPY selling weighed on the currency pair. Traders are patiently waiting for this afternoon’s release of the Federal Open Market Committee minutes from the December 11 meeting. They are hoping to get some clarification on the Fed’s monetary policy outlook for 2020.
GBP/USD sank to $1.3056 from $1.3159 before rallying to $1.3090 in Toronto trading. Widespread U.S. dollar selling combined with ongoing nervousness around U.K. politics and Brexit, in addition to holiday reduced liquidity contributed to the choppy price action.
The Canadian dollar is benefiting from the jump in oil prices, but to a lesser degree than in the past due to pipeline constraints in Alberta. The currency is also supported by sentiment that the Bank of Canada has shifted to a more hawkish, than dovish monetary policy. Bank of Canada Deputy Governor is speaking today. The BoC is not publishing her remarks which suggest she isn’t talking about monetary policy.
The U.S. December Institute for Supply Management Manufacturing Purchasing Managers Index is due today. Some analysts expect an upside surprise to the forecast of 49.0 which, if correct, will underpin the U.S. dollar. There are not any Canadian economic reports today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
