Morning Commentary: Oh Canada!

Foreign Exchange - Morning Commentary
Oh Canada!
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets have been whipsawing all week long as tweets and White House communications have played havoc with investor sentiment. We have shifted from pessimism on a Phase 1 trade deal early in the week to optimism once again. Global equities are trying for a second consecutive day of positive returns and this has provided a mild “risk-on” environment for various asset classes.  Global interest rates and commodity prices remain better bid while safe haven assets and currencies are weaker. The U.S. dollar is weaker for the fifth day in a row as the rising British pound provides coattails for other European currencies to rise.

While the market has generally been consumed with the ramifications of U.S. – China trade talks and Brexit on the markets, the Canadian dollar has been on the move and bears watching. The Canadian economy has been very resilient compared to its peer group and other G7 countries this year; this has allowed the Bank of Canada to chart its own course with regards to monetary policy and has kept interest rates unchanged since last October while others have been cutting.

Most recently, Canadian 2-year interest rates (1.67%) have outpaced U.S. 2-year interest rates (1.60%) and have helped to energize the Canadian dollar (CAD) as interest rate differentials are an important factor in determining the value of the CAD. As U.S. and Canadian interest rates have shifted their respective paths, this has allowed the Canadian dollar to be the top performing major currency this year as it is up by ~3.6% against the U.S. dollar…Aussie and Kiwi are down by nearly 3.0%.

Adding to the near term glow for the CAD, momentum and technical factors have reinforced the fundamentals. The CAD has broken above its key 50, 100, and 200-day moving averages adding to its near term strength. If the Fed is on hold ad infinitum as growth and inflation remain below 2.0%, currencies such as the CAD could continue to advance.
  • Market dynamics and psychology are always shifting. The euro has suffered all year long as continuing weak economic data reinforces the perception about a continuing weak currency. There has been a subtle shift recently and today is a good example of that shift. German factory orders were expected to rise by 0.4% but fell by 0.4%, dragging the YoY number down to -5.5%. EZ retail sales also disappointed. In the past, the euro would have weakened but the euro is up on the day. This shift in market dynamics bears watching as it could signal a shift in the euro market psychology.
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