The Canadian dollar is holding onto one of its strongest quarters in more than a year, even though trade talks between Ottawa and Washington fell apart in late August. Analysts at National Bank of Canada point to a mix of upbeat domestic data, firmer commodity prices and a persistent geopolitical risk premium in oil and gold as the forces keeping the currency well supported.
USD/CAD Slides From A 19-Month High, Then Steadies
USD/CAD had climbed to around 1.42 by the end of June, marking the weakest level for the loonie in 19 months. A pair reading near 1.42 meant it took roughly C$1.42 to buy a single US dollar, a sign of just how much ground the Canadian currency had lost. From there, a string of positive economic surprises out of Canada, firmer prices for the commodities the country exports, and rising hope that trade tensions between the two neighbours would ease combined to pull the pair all the way down to 1.377 by August 21, its strongest point of the quarter for the loonie.
That optimism did not last. Trade negotiations between Ottawa and Washington broke down shortly after that August 21 low, and USD/CAD has since climbed back above 1.38. Even so, National Bank of Canada notes the loonie is still sitting on a quarter-to-date gain of roughly 2.5% against the US dollar, a move the bank says is broadly in line with the forecast it had set at the start of the summer.
Strait Of Hormuz Tensions Keep A Risk Premium In Oil And Gold
Renewed tension in the Strait of Hormuz during August has made traders far less confident that the situation there will return to normal by the end of the year. National Bank of Canada says market-implied odds of that happening have fallen below 30%, down sharply from more than 50% previously. Because the Canadian dollar tends to move with commodity prices, that lingering risk premium in both oil and gold has become another pillar of support for the loonie even as the trade dispute with Washington drags on.
Aussie Dollar Trades Near Its Best Level Since Mid-May
Currency markets elsewhere are showing a similar pattern of a weaker US dollar lifting other majors. AUD/USD held above 0.7200 during Tuesday's Asian session, close to its highest level since May 14. A rallying Japanese Yen has kept the US Dollar under broad pressure, outweighing whatever support the greenback might otherwise be drawing from hawkish bets on the Federal Reserve and from ongoing geopolitical tensions. On top of that, firming expectations that the Reserve Bank of Australia will raise interest rates again later this month have given the Aussie its own tailwind. Mixed trade balance data out of China, however, kept the pair from extending those gains any further for now.
Yen Strength Pulls USD/JPY Off A Six-Month Low
USD/JPY told a related story on Tuesday. The pair touched a six-month low below 153.00 earlier in the day before rebounding to trade above 154.00 in the second half of the session. That bounce looks like a technical correction rather than any change in the underlying trend, since upbeat Japanese wage growth data and an upward revision to Japan's second-quarter GDP have reinforced bets that the Bank of Japan will raise interest rates next week, a backdrop that continues to support the Yen even during the pullback.
Diesel Prices Are Telling A Different Story Than Crude
Away from currencies, the oil market looks calmer than it did a few months ago, but the diesel market is flashing a very different signal. The US diesel crack spread, which measures the premium that ultra-low sulphur diesel futures command over WTI crude, recently pushed above $100 per barrel for the first time on record, reaching an intraday high of just over $102.00. A crack spread that wide shows refiners are being paid unusually well to turn crude into diesel, even while crude prices themselves stay relatively contained.
For everyday households and businesses, these currency and energy market shifts rarely stay contained to trading screens. A firmer Canadian dollar makes Canadian goods and travel comparatively more expensive for Americans, while Australian and Japanese businesses watch their own currencies for similar reasons. Meanwhile a diesel crack spread above $100 a barrel raises the cost of running trucks, ships and heavy machinery, a cost that tends to filter through to freight rates and, eventually, retail prices.
