The Canadian dollar is in demand. It is not alone. The commodity currency bloc, euro, and sterling added to yesterday’s gains, as a wave of optimism washes over markets. COVID-19 restrictions are being eased or phased out altogether and that has elevated expectations for a sharp global economic recovery.
Asia equity indexes closed with gains, except for those in China. European bourses have surged higher as have S&P 500 futures, which suggests a strong open on Wall Street today. However, beneath the façade of optimism lurks China tensions, and they could turn the risk rally into a risk retreat.
China and the U.S. are exchanging words over the U.S. sanctioning 24 Chinese companies based on security concerns and because of human rights issues. The U.S. House is poised to approve legislation that sanctions Chinese officials for human rights violations today. China and India have moved troops to the “Line of Control” border. China levied tariffs on imports of Australian barley, threatened more tariffs on other goods, and banned imports from for meat producing companies, all because the Australian government wanted an inquiry into the COVID-19 pandemic.
Canada may face the ire of an angry China today if the British Columbia Supreme Court ruling on “double criminality” does not favour Huawei CFO Meng Wanzhou. Canada complied with a U.S. extradition request and detained Ms. Meng. China sees her detention as Canada meddling into U.S./China affairs, while being a lackey of the U.S. administration. If China is unhappy with the results, China may impose sanctions and tariffs on Canada.
Despite these risks, the Canadian dollar continued to add to this week’s gains. USD/CAD dropped from $1.3808 in Asia to $1.3730, even as West Texas Intermediate oil prices retreated from their $34.30/barrel overnight peak. The short term USD/CAD technical outlook is bearish following the break of support at $1.3850, which suggests further losses to $1.3410.
European Union (E.U.) officials did their part to stoke positive risk sentiment. They are proposing an €825-billion COVID-19 relief fund, composed of loans and grants. There is still a lot of ground to cover as the proposal needs the unanimous agreement of all 27 EU members. Denmark, Sweden, Austria and the Netherlands are not on board with the plan.
Prior to the announcement, European Central Bank President Christine Lagarde warned that European Union Gross Domestic Product would fall about 8-12% in 2020.
The Canadian dollar will be vulnerable to an unfavourable ruling for the Huawei CFO while tracking broad U.S. dollar sentiment.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians