The Canadian dollar is caught between a rock and a hard place. A newly pessimistic outlook for 2019 oil prices and the Bank of Canada’s (BoC) shift toward a dovish monetary policy combined to shift the focus to 73 cents vs the U.S. dollar.
The Canadian dollar stayed under pressure last week when West Texas Intermediate (WTI) oil prices were unable to gain any traction above $53.50 U.S./barrel. The International Energy Agency warned that 2019 global supply could outstrip demand in 2019 because of rising U.S. production.
Even news that China had made some concessions in the US/China trade war didn’t shift sentiment. The falling oil prices have exacted a toll on the Canadian dollar. Western Canada Select (WCS) trades at a discount to WTI due to the quality of the crude, a shortage of pipeline capacity and a lack of market access other than the U.S.. The low prices are forecast to knock 0.5% from Canadian GDP growth in 2019.
The Canadian dollar is being undermined by the resurgence of diverging Bank of Canada and U.S. Federal Reserve interest rate policies. BoC Governor Stephen Poloz indicated that the pace of Canadian interest rate hikes might be less than what was previously expected. He blamed trade woes and oil prices for the uncertainty. The Fed is still on pace for another four rate increases in 2019 although that number could be lowered on Wednesday when a new Summary of Projections is released.
The Bank of Canada is also concerned about slowing growth momentum in Canada which is another reason they will temper their enthusiasm for rate increases.
The Canadian dollar is suffering from the perception that China’s anger with Canada following the arrest of the Huawei CFO will have negative consequences for Canadian trade or businesses investing in China.
The Canadian dollar is also suffering due to the focus on European and Great Britain developments. The British pound has traded in a volatile manner for the past week due to the UK parliament vote on Brexit being cancelled, followed by a "no-confidence" vote by Conservative MPs against Prime Minister Theresa May. The Prime Minister prevailed, and GBP/USD rallied.
Traders were also focused on the European Central Bank (ECB) meeting and whether they were concerned enough about France and Italy budget developments to adjust their monetary policy. They weren’t.
Traders are looking ahead to Wednesday’s domestic inflation report. Canada November Consumer Price Index is expected to drop substantially from October’s 2.4% rise. Forecasters are predicting a 1.9% increase, which if correct will not doe the Canadian dollar any favours.
There are not any Canadian or U.S. economic reports of note, due today, leaving the Canadian dollar to track oil and Wall Street price movements.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
