The Canadian dollar is taking flight thanks to U.S. fiscal stimulus, a dovish Federal Open Market Committee outlook, and rising oil prices.
WTI oil climbed to $64.82 in New York today, from $60.55/b last Thursday. Goldman Sachs analysts forecast even higher prices, as U.S. fiscal stimulus drives a global economic boom, which will increase demand for crude. The Canadian dollar got a bit of a boost on the move.
Overnight, equity traders liked what they heard from President Joe Biden and Fed Chair Jerome Powell. The major Asia equity index closed with gains except for Japanese markets, which were closed for a national holiday. European bourses are trading with gains, and S&P futures are at record highs.
The details of Biden’s $1.8-trillion "American Families Plan" were well-known before his speech, but the promise of more fiscal stimulus keeps the U.S. dollar on the defensive.
The Fed left interest rates and monetary policy unchanged as widely expected. The pre-meeting speculation of a tapering announcement proved to be unfounded. The Fed didn’t even hint at slowing Quantitative Easing purchases. The only tweak in the statement was that "considerable risks to the economic outlook" are not "considerable" anymore. Instead, "risks to the economic outlook remain." Perhaps they believe the economy is improving. Even so, Powell insisted that "it is not time yet," to even start talking about tapering.
The Canadian dollar rallied nearly 2.8% since the Bank of Canada said domestic interest rates would rise earlier than expected. USD/CAD fell from a BoC meeting peak of $1.2640 to $1.2290 overnight, making the loonie the best performing currency against the U.S. dollar during that time.
What does BoC Governor Tiff Macklem know that Jerome Powell doesn’t? What changed between the BoC March and April meetings to force the BoC to bring forward a G-10 leading, post-pandemic rate hike?
Residents of Ontario, Manitoba, Saskatchewan, and Alberta know the third-wave coronavirus outbreak worsened. Non-essential businesses were ordered closed, indoor and outdoor restaurant dining banned, Golf courses, tennis courts closed, and people told to stay home. The military has been called into Ontario as hospitals are overwhelmed with COVID-19 patients. In the face of that havoc, the timing of the BoC’s interest rate plans is questionable.
Nevertheless, the prospect of widening CAD/USD interest rate differentials sparked a wave of USD/CAD selling.
The Bank of Canada expects Canadian consumers will drive domestic growth to 6.8% in 2021. March Retail Sales data rose 4.8% compared to the forecast of 4.0%, supports their view. The Canadian dollar rallied on the news.
The consensus forecast for US Q1 Gross Domestic Product is 6.1%, although many economists are penciling in much higher levels. Other data includes weekly Jobless Claims (forecast 549,000) and Pending Home Sales. There are no Canadian reports.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
