The Canadian dollar is inching lower, weighed down by broad US dollar demand and the recent steep drop in oil prices. West Texas Intermediate (WTI) oil prices have plunged 24% since January 7, and that was a significant contributor to the Canadian dollar’s 2.6% decline during the same period.
WTI bottomed out at $49.68/barrel in Asia, overnight, before bouncing to $51.27 U.S./b. The coronavirus has weighed heavily on oil prices. Even before the coronavirus, the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) warned that global oil markets risked being over-supplied in the first half of 2020. China’s crude consumption has dropped 20% since the outbreak. Sinopec crude processing has fallen around 600,00 barrels /day, which suggests the IEA and EIA predictions will be a reality.
There were signs of a nascent recovery in risk sentiment yesterday and overnight. The U.S. Institute for Supply Management Manufacturing Purchasing Managers Index was 50.9, which was better than the 47.8 seen in December. Equities rebounded, and the Dow Jones Industrial Average closed with a 0.51% gain, although the increase was not enough to recoup all of Friday’s loss of 2.1%. Asia and European equity indices followed Wall Street’s lead. The major Asian indexes closed with gains, European bourses are in the green, but Wall Street equity futures point to a flat opening.
The Australian dollar rallied after the Reserve Bank of Australia (RBA) left interest rates unchanged. Many analysts and traders expected the RBA to cut interest rates to 0.50% from 0.75 due to the recent weak employment report and the expected negative impact on growth from the wildfires and coronavirus. Instead, the RBA was content to "wait and see." AUD/USD rallied from $0.6680 to $0.6730. NZD/USD lagged the AUD/USD move.
USDJPY rallied on the back of the improved risk tone. Prices climbed from 108.56 to 109.12 as some safe-haven trades were unwound. A bounce in U.S. Treasury yields supported the rally. Bank of Japan Governor Haruhiko Kuroda said that the BoJ could ease monetary policy if needed in the wake of the coronavirus, but added it was too early to tell.
EUR/USD continued to be weighed down by broad U.S. dollar strength stemming from yesterday’s ISM PMI data which served to underscore the outperformance of the American economy to that of the eurozone. Eurozone economic data was second-tier and not a factor for traders.
GBP/USD dropped from $1.3015 to $1.2948 in Asia and then recouped all of the losses in Europe and early Toronto trading, rising to $1.3040. The move was due to better than expected U.K. Construction PMI and concerns that yesterday’s steep plunge was an "over-reaction."
The Canadian dollar will be subject to U.S. dollar sentiment, which could be bolstered if today's’ Factory Orders data is better than expected.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
