It has been a slow news week for the Canadian dollar this week, with the loonie’s price action mostly being dictated by sentiment in other FX pairs. With oil climbing to an 11-month high of $53.45 per barrel in yesterday’s session, while the US dollar traded softer across the board, the Canadian dollar enjoyed a 0.59% rally. This move was just shy of reversing Monday’s losses of 0.68%. Canadian news yesterday focused on the cabinet reshuffle after Industry Minister Navdeep Bains decided to leave politics. Bains’ departure prompted a reshuffle in the government’s front bench, but brought about speculation whether Trudeau was also using this opportunity to consolidate the Liberal party’s position ahead of a snap election. With the government embarking on substantial budget deficits to shield the Canadian economy from the pandemic, should the speed of vaccinations pick up then it may look like an opportune time for Trudeau to take to the polls in an effort to regain a majority in the House. However, the Prime Minister naturally deflected questions on the matter when speaking to the press yesterday. Today is another quiet day for the Canadian economic calendar, with the broad move in the USD dominating the direction of the USDCAD pair. However, given the loonie’s recent sensitivity to rising oil prices, the Canadian dollar may turn around this morning’s losses at 15:30 should US oil inventory data fuel an even higher WTI price.
The dollar came under pressure yesterday as two Fed officials pushed back on the possibility of QE tapering any time soon, while markets have also been playing close attention to political headlines around removing Donald Trump from the office. Treasury yields slipped along with the dollar, with the 10-year falling one basis point, adding to its two basis point decline on Tuesday, as the QE tapering comments made markets rethink how high bond yields can rise while being under pressure from the pandemic. Meanwhile, Mike Pence ruled out the possibility of removing Donald Trump from the office and ensured that the resolution passed by the House that pushes him to take over Trump’s position under the 25th Amendment won’t happen. The House will vote on the impeachment today, where only a simple majority is needed to get the vote through after which a Senate trial would be scheduled. For the Senate, however, the vote is less likely to go through as it requires a two-thirds majority and an emergency session to be called. In commodity markets, WTI oil rallied overnight to well above the 53 level – its highest level since March 2020. The EIA Crude Oil Inventory Report at 15:30 GMT may lead to further volatility in crude oil markets today while the dollar continues to take cues from risk sentiment and political news headlines.
Today is one of those days where FX markets are following textbook trading signs. The euro is holding onto its gains across the antipodeans and SEK this morning while leading losses against the safe haven currencies USD, CHF, and JPY, and the petrocurrencies CAD and NOK following dampened risk sentiment and a rise in WTI prices. Sterling is also trading higher against the euro following the BoE comments, indicating that most of the overnight price action can be related to market movers outside of the eurozone. With European Central Bank President Christine Lagarde scheduled to speak at 09:00 GMT today at a Q&A, the euro may still take cues from home. Additionally, markets will focus on Italian and eurozone industrial production at 09:00 and 10:00 GMT for further euro price action clues. The consensus foresees a 0.2% slowdown in output in the euro area as the pandemic and its fallout weigh heavily on demand and activity, whereas Italy’s contraction is estimated to print at 0.4%, according to the median of forecasts submitted to Bloomberg. Meanwhile, markets still keep a close eye on Italian politics as Ex-Premier Matteo Renzi, leader of the Italy Alive party, stated his party will decide today whether it will withdraw its ministers and thereby topple Italian PM Giuseppe Conte’s government.
Sterling’s 1.1% rise against the dollar and 0.65% rally against the euro yesterday can mainly be attributed to comments by Bank of England Governor Andrew Bailey. With speculation rife that the Bank could enter negative territory as early as August, according to money market pricing, and Goldman Sachs placing the odds of a cut into negative territory at February’s meeting at 4-to-1, Bailey’s statement that there are a lot of issues with negative rates jolted money markets and sent the pound higher. Overnight Index Swaps are now pricing a full rate cut to -0.1% in December 2021, moving it back by 3 meetings from August’s after Bailey’s comments, while markets have completely priced out the prospect of negative rates being announced in February. While there is still speculation around negative rates, this is likely to be cleared up in February’s meeting when markets will receive more information about the feasibility of the option with commercial banks. For now, the pound continues to enjoy a mild spillover from yesterday’s sentiment, sitting just shy of a tenth of a percentage point higher against the dollar.