The Canadian dollar is marching to the beat of its own drummer. The loonie is the worst performing G-10 currency since yesterday’s close, losing 0.41% against the U.S. dollar. The other G-10 majors gained, led by a 0.52% jump in GBP/USD.
Canadian dollar direction was determined by broad U.S. dollar sentiment and direction for the past many months. That changed overnight. Other currencies were in demand, but not the loonie. USD/CAD closed at $1.2699, and climbed steadily until hitting resistance in the $1.2750 area, where it sits in early Toronto trading.
It is rare for USD/CAD to trade against the grain. The rally could be due to the execution of a large order to buy USD/CAD, perhaps for year-end positioning. It has happened many times before. There is also talk that the gains were due to GBP/CAD and EUR/CAD demand alongside CAD/JPY selling pressures, with those flows occurring in relatively thin FX markets.
Bank of Canada Governor Tiff Macklem may have played a role. During the Q&A period following a speech to the Vancouver Board of Trade, the governor answered a question about the currency, saying "We do not target the exchange rate. The exchange rate is set by the market."
The significance of that statement is that it is a variation of similar statements made by U.S. Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde, and Bank of England Governor Andrew Bailey. If the exchange rate is not targeted, why is it suddenly a discussion point for central bankers? "The lady doth protest to much, methinks."
GBP/USD continued its rally, rising from $1.3436 to $1.3545 in Toronto today. Traders jumped all over a comment by European Union Commission President Ursula von der Leyden. She said "I can not tell you whether there will be a deal or not but I can tell you there is a path to an agreement now. The path may be very narrow, but it is there." British bookmakers pegged the odds of a deal at 1:4, meaning to win a pound, you need to bet four.
EUR/USD cracked above $1.2200, a level last seen in April 2018. The rally was fueled by broad-based U.S. dollar selling from "risk-on" sentiment, expectations for another dovish Federal Open Market Committee meeting, and better-than-expected Markit Purchasing Managers Index data from Germany and the Eurozone. Eurozone Manufacturing PMI was 55.5 (forecast 53), and German Manufacturing PMI jumped to 58.6 from 57.8 in November. The chief economist at Markit said that "the data hint at the economy close to stabilizing after having plunged back into a severe decline in November amid renewed Covid-19 lockdown measures."
Canada Consumer Price Index is expected to be 0% m/m in November, and 0.8% y/y and U.S. Retail Sales (forecast -0.3%).
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
