The Canadian dollar opened soft and then drifted lower in early New York trading. USD/CAD rallied 1.3% since Wednesday’s low of $1.2448, touching $1.2610 yesterday.
The Bank of Canada sparked the rally by downgrading 2021 Gross Domestic Product growth to 6.0% from 8.5% in the quarterly monetary policy report, blaming the impact of the third wave coronavirus for the decision. The BoC was concerned about labour market slack and said that Canada needs 550,000 new jobs, just to achieve pre-pandemic levels.
FX traders went into the meeting expecting a hawkish bias and were positioned accordingly. When it didn’t occur, they scrambled to cover their exposures, driving the Canadian dollar lower.
Even so, the BoC isn’t the only reason the Canadian dollar is under pressure. West Texas Intermediate (WTI) oil prices have fallen 7.4% since July 6, falling from $77.00/barrel to $71.22/b overnight. The drop in prices is in response to the Organization of the Petroleum Exporting Countries and United Arab Emirates (UAE) agreeing to new a new output level to form the basis of production quotas.
U.S. Federal Reserve Chair Jerome Powell sparked .S. dollar demand yesterday when he said “This is a shock going through the system associated with reopening of the economy, and it has driven inflation well above 2%. And of course, we’re not comfortable with that.”
Traders are also concerned about coronavirus-delta variant outbreaks in many regions derailing the global recovery story. There are plenty of discussions that U.S. growth has peaked, suggesting there is more downside than upside.
EUR/USD had an uneventful session in a narrow $1.1798-$1.1821 range. Eurozone June inflation was confirmed at 1.9% y/y, which contrasts sharply with U.S. Consumer Price Index at 5.4% for the same month. EUR/USD support is at $1.1770, which, if broken, targets $1.1700.
GBP/USD rallied from $1.3793 to $1.3861 then dropped to $1.3805. Broad U.S. dollar demand weighs on prices, while the belief that the Bank of England is shifting to a hawkish bias, underpins the currency pair.
AUD/USD and NZD/USD are trading near session lows due to broad U.S. dollar strength following Powell’s testimony yesterday. AUD/USD is also suffering from concerns around its latest coronavirus outbreak. NZD/USD outperformed against AUD due to higher NZ inflation (actual 3.3% y/y vs forecast 2.8%)
U.S. Retail Sales are forecast at -0.4% compared to -1.3% in May.
Canada Housing Starts and Wholesale Sales are due but should not impact FX.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians