The Canadian dollar rally ended abruptly yesterday. The currency had climbed steadily in the previous 48 hours, supported by equity portfolio managers re-balancing their portfolio’s ahead of the April 30, "fix", which is when their positions are benchmarked against the current FX levels.
The steep rise in the Dow Jones Industrial Average, which finished April with gains of 16.2%, the S&P 500 index, jumping 17.9%, and the NASDAQ, flying 20.8%, fueled demand for Canadian dollars as managers realigned their portfolios to their mandates. Those flows evaporated in the morning, and the Canadian dollar sank.
The Canadian dollar was also under pressure after risk sentiment turned negative because of reports that U.S. President Trump planned to seek retribution from China because of the way Chinese officials managed the COVID-19 outbreak. The US has dropped hints that they may use tariffs to extract concessions from Beijing.
Thursday’s weekly U.S. Jobless Claims report was another negative for risk sentiment. The increase of 3.8 million claims brought the six-week total of unemployment to around 30.5 million. The negative sentiment may be reinforced today when the Institute for Supply Management Manufacturing PMI data is released. April PMI is expected to drop to 36.9 from 49.1, underscoring the impact of COVID-19 on the economy.
May Day holidays drained liquidity in Asia and Europe. In Asia, China, Hong Kong, and Singapore were closed. Most of Europe was closed as well. The U.K. was the only major center open in Europe.
GBP/USD traded with a negative bias, falling from $1.2599 to $1.2528. Royal Bank of Scotland said it was taking an £800 million write-down due to COVID-19 while Ryanair announced 3,500 layoffs. That news depressed UK stock prices and GBPUSD went along for the ride.
EUR/USD got an added boost from renewed safe-haven demand and rose to $1.0989 from $1.0836. Thursday, the European Central Bank just slightly tweaked the terms of the refinancing operations and left interest rates unchanged. Traders were disappointed at the mild response.
West Texas Intermediate prices are on the defense, but consolidating yesterday’s gains. WTI traded in an $18.10-$20.42 range overnight and are just above the middle of that range in early Toronto markets. News that Opec production exceeded 30.0 million barrels in April, even as storage space was becoming more limited, capped gains, but hopes that global economies will soon reopen are underpinning prices.
The Canadian dollar will remain vulnerable to further weakness but is likely to consolidate yesterday’s losses inside the overnight range, today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
