The Canadian dollar peaked then plummeted in a wild FX session, yesterday and overnight. And it wasn’t even the worst-performing currency against the U.S. dollar in the past 24 hours. That honour goes to the Australian dollar, which shed 3.7%. The New Zealand dollar was the runner-up, losing 2.8%.
None of those currency losses had anything to do with domestic influences. They happened because Wall Street traders got spooked. They started getting nervous when the U.S. Federal Reserve issued a more-dovish-than-expected policy statement. It warned that the ongoing COVID-19 crisis would impact the economy for a long time, and because of that, interest rates would remain low. The Fed's dot-plot forecast suggested U.S. rates would stay at 0.25% until 2022.
Traders started selling equities. The selloff exploded on reports that U.S. coronavirus cases were on the rise, again, sparking fears of a second pandemic. Oil prices began to fall, and that exacerbated the negative sentiment. By the end of the day, the Dow Jones Industrial Average (DJIA) had lost 6.9%.
Overnight, Asian equity markets retreated, but not as aggressively as those in the U.S. European markets are grinding higher, trying to recoup Thursday’s losses.
The U.S. dollar was in demand as Wall Street fell and finished the session with gains across the board. It gave back a small portion of the rally, in overnight markets, but remains well above, yesterday’s lows.
The jury is still deliberating as to whether the latest market rout is a correction or the start of a new downtrend. Many believe it is a correction. A 48% rally in the DJIA in less than three months just screamed for a correction. Global central bank zero-interest-rate policies drove investors to chase yield, and that yield was found in equity markets. That won’t change any time soon, as rates will be low for an extended period.
New COVID-19 cases have been increasing since May 25, and the NASDAQ made a new record high.
Arguably, the U.S. is better prepared to manage a second outbreak as shortages of personal protection equipment, ventilators, etc have been fixed.
Meanwhile, Canadian dollar direction is dictated by U.S. dollar sentiment.
There isn’t any conclusive evidence that the greenback is resuming its uptrend as confirmation is lacking in EUR/USD, USD/JPY and AUD/USD price action.
Today’s U.S. data includes Michigan Consumer Sentiment, but it is unlikely to have any impact on FX markets.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
