The Canadian dollar dipped below the psychologically important USD/CAD $1.3000 level very briefly, touching $1.2996 before popping back. Just below is the 77.00 cent level, which is what a Canadian dollar is worth in the USA.
The Canadian dollar rally is not a Canadian dollar story. Instead, it is the U.S. dollar story, and that is a tale of a too-dovish Federal Reserve that is on record for saying US interest rates will stay low for an extended period.
Last week, Federal Reserve Chair Jerome Powell announced a major shift in the Fed's thinking. He said that instead of aiming for a 2.0% inflation goal, the central bank would adopt average inflation targeting policy of around 2.0%. Powell justified the change as necessary to prevent choking of an economic recovery by being forced to increase rates if inflation hit 2.0%. What he left unsaid was why the change was required at this juncture when the Fed has been unable to get inflation to 2.0%.
Yesterday, Fed Deputy Chairman Richard Clarida noted that Fed policy might have gone astray by using models that were not effective in a low-rate environment.
The U.S. dollar slide that started in the middle of May is continuing unabated on the first day of September. EURUSD is approaching levels last seen in May 2018, while GBPUSD has recovered more than ½ of its post-Brexit referendum losses.
Euro and GBP traders are ignoring the rising risk of a "no-deal" Brexit. E.U. and U.K. officials have been negotiating a trade deal ahead of the December 31 deadline. If an agreement isn’t reached, the U.K. will leave the E.U. without a trade deal and be subject to World Trade Organization rules, which are far less favourable for trade. GBP/USD traders are ignoring that risk.
EUR/USD traders are ignoring the risks from election tensions in Belarus which has the E.U. on the opposite side of Russia. The E.U. has problems in the eastern Mediterranean Sea. It is trying to dissuade Turkey from its aspirations toward Greek territorial waters and the massive energy deposits located there. France and Italy have sent warships to the area in support of Greece, while Turkey has dispatched its naval vessels.
The U.S. election is another source of concern as President Trump fires his trade cannon at the E.U., Canada, and China.
U.S. Institute for Supply Management Manufacturing Purchasing Managers Index data is due today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
