The Canadian dollar is defying gravity. The domestic currency is clawing out gains even as the other commodity bloc currencies drift down from this week’s peak levels. The recent spike in oil prices is fueling the Canadian dollar gains.
West Texas Intermediate (WTI) climbed from $50.90U.S./barrel yesterday, to $52.90 U.S./barrel this morning, in early Toronto trading. The oil price gains followed a shift in risk sentiment and new U.S. sanctions.
The U.S. government black-listed Russia’s state-owned oil company, Rosneft, for helping Venezuela to avoid American sanctions. The blacklist comes as the Americans claim to be trying to prevent the existing Venezuela government from "looting" oil assets. Russia was not impressed. The foreign ministry said, "Russia categorically does not accept unilateral restrictive measures by which the U.S., striving for global hegemony, is trying to subjugate the whole world to its will."
The sanctions were only part of the reason for the oil price rally. Global risk sentiment turned positive following reports from China that the number of new coronavirus cases reported daily, is declining, which suggests that the worst may be over. Also, China is reportedly preparing new economic stimulus measures, including another interest rate cut.
The Canadian dollar joined in the latest risk-seeking rally despite yesterday’s ugly Manufacturing Sales report. The December results were expected to rise 0.5% but instead dropped 0.7%. The details were not encouraging. Shipments have declined for two quarters, and inventory levels are the highest since 2007.
The news raised the risk that the Bank of Canada will cut rates in two weeks.
The domestic economy is already suffering from the lingering impact of the U.S./China trade war, which is exacerbated by the coronavirus outbreak. The recent rise in inflation is reportedly due to transitory factors, and the ongoing railway blockades will be a drag on domestic growth.
Elsewhere, EUR/USD continues to trade softer. Prices are weighed down by weak eurozone economic growth and the dovish outlook of the European Central Bank. Weaker than expected eurozone Construction Output data and yesterday’s bearish German ZEW survey continue to undermine the single currency.
GBP/USD couldn’t get any traction in Asia, and a post-Consumer Price Index data rally ended with a thud. U.K. January CPI rose 1.8% y/y, a tick better than forecast.
However, ongoing concerns around the upcoming U.K./E.U. trade negotiations encouraged sellers.
FX markets are cautious ahead of this afternoon’s release of the Federal Open Market Committee minutes from January 29.
Traders are hoping for some clarity on the inflation and interest rate outlooks but are likely to be disappointed.
Fed Chair Jerome Powell’s recent testimony to Congress has trumped the impact from the release of the minutes.
Canada CPI data is due today. Higher than expected results will be discounted because they are due to what the BoC describes as "transitory" influences.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
