The loonie (CAD) has been one of the best G10 performers this week. Giving the Canadian dollar a big help has been the fact that it’s been a very much risk on week (remember, CAD is a “risk sensitive currency that has a high correlation to stocks).
Despite a risk off blip on Tuesday night when US President Trump announced that he had halted fiscal stimulus talks with the Democrats, US stocks (the S&P 500) are looking at gains on the week of about 3%, while crude oil markets are looking at gains north of 10% (CAD has an even stronger correlation with crude oil markets, given that it is a big oil exporter).
The reason for risk on has been 1) Trump seemingly returning to full health, 2) the fact that, despite what Trump said on Wednesday, US stimulus talks are still ongoing over numerous “mini deals” and 3) Joe Biden has widened his lead over Trump in the polls, reducing the likelihood of a contested outcome.
But that does not fully explain why CAD has done so much better than the likes of AUD and NZD (also highly correlated to stocks and commodity markets).
Firstly, a dovish RBA meeting, followed by dovish comments from key RBNZ policy makers have done the two antipodes little by way of favours.
But giving the loonie a BIG helping hand today was the September Canadian labour market report;
378k jobs were added in September, well above expectations for 150k jobs to be added and a fifth consecutive month of improvement, while the unemployment rate dropped to 9.0%, a significant beat on expectations for 9.8% - this puts the unemployment rate within 4% of its pre-Covid-19 levels. 88% of the jobs added in September were in full-time positions (seen as “better” jobs to add to the economy than part-time jobs, given better stability and higher wages). Moreover, the participation rate jumped to 65% against expectations for it to come in at 64.7% (basically, more people are actively looking for work in September).
In sum, a stellar report.
As a result, USDCAD shot lower from around 1.3775 to below the 1.3150 mark, around which it has since retraced to; an impressive near 200 pip turnaround since USDCAD reached highs of the week on Wednesday of around 1.3350.
In terms of what’s next for the loonie; risk appetite and the fate of the crude oil market look set to continue to dominate price action in USDCAD… but should the Canadian economy continue to show solid performance in face of the worsening global outlook as Covid-19 cases spike (particularly in Europe), CAD may also derive some support from domestic factors.
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