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The Canadian dollar is making an effort to rally. It is proving to be a struggle because global risk sentiment continues to teeter between "risk-on" and "risk-off." A lack of domestic data is another issue for Canadian dollar traders. The domestic economic report cupboard has been bare this week, exposing Canadian dollar direction to the whims of global FX moves.
Oil prices got a lot of attention this week. Rising U.S.-cured inventories, the report of record U.S. oil production in October and ongoing concerns of a global growth slowdown drove West Texas Intermediate (WTI) prices to a low of $54.78 U.S./barrel on Tuesday. That plunge undermined the Canadian dollar and encouraged bearish sentiment. Oil prices recovered somewhat, after reports that the Organization of Petroleum Exporting Countries (OPEC) is considering new production cuts which could be announced at the December 6 meeting in Vienna. The Canadian dollar traded higher on the news.
Global FX markets were mildly risk positive overnight, but that may have been more pre-weekend profit-taking than a wholesale shift in risk sentiment. That’s because of the on-going European Union (E.U.) and Italy budget disagreement and United Kingdom (U.K.) political turmoil.
The E.U. hasn’t made any progress in getting Italy to scale back plans for a budget deficit of 2.4% of Gross Domestic Product. Italians are tired of austerity, and the E.U. is concerned about other E.U. nations following Italy’s lead. Those concerns have weighed on EUR/USD and gave rise to risk aversion trades, which undermined the Canadian dollar as well.
U.K. political turmoil has roiled sterling markets. GBP/USD was $1.3175 on November 7 and touched $1.2725 yesterday. The 3.4% plunge was precipitated first by news of a Brexit deal and then by Conservative party members outrage at the terms of the deal. There are reports that Prime Minister Theresa May could face a "no-confidence" vote next week. The Canadian dollar isn’t directly affected by the U.K. politics. However, EUR/USD is exposed. A no-deal Brexit could lead to EUR/USD selling and a shift to risk aversion trades. If so, it would negatively impact the Canadian dollar.
The U.S./China trade dispute is another uncertainty that is keeping FX traders on their toes. President Trump may still impose another round of sanctions against China in January. If that happens, it will heighten global economic slow-down fears which in turn would undermine the Canadian dollar.
FX volatility could turn higher next week. The U.S. Thanksgiving holiday is on Thursday and markets will close early on Wednesday. Many traders take the entire week off. FX trading volumes will be significantly reduced. USD/CAD volatility may escalate on Friday when Consumer Price Index and Retail Sales reports are released.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians