By Michael O’Neill

St Patrick’s Day, Shamrocks, and Leprechauns with pots of gold, are synonymous to Ireland. In Canada, 11.5% of Canadians claiming Irish ancestry, will be looking for the pot of gold at the bottom of a lager glass.  Later, they will be looking for a pot of Loonies to pay for their lagers. Those Loonies could get more expensive if the ongoing European Union/United Kingdom Brexit plans take a turn for the worse and triggers a global rush for safe-haven assets.

The UK is self-flagellating over its June 2016 referendum decision to leave the European Union (Brexit) as of March 29, 2019.  The news sent the British pound tumbling.  It lost 23% of its value against the US dollar at one point, before rallying to 1.4370 a year ago.  That’s when prices were bolstered by better than expected data, rising inflation, and talk that the Bank of England would raise interest rates.  That level has not been seen since, after Brexit uncertainty took another toll on GBPUSD which slid steadily until the end of 2018.  

The motley mob of misfits in the British House of Commons began 2019 by thoroughly rejecting Prime Minister Theresa May’s Brexit plan.  Nearly three months later, on March 12, they rebuffed her revised plan.  Following that vote, a collective “Doh!” echoed around the Chamber.  It suddenly dawned on the 391 MP’s opposed to Ms May’s plan that there were only seventeen days before Article 50 came into effect, which evicts the UK from the European Union and all the benefits of membership.  The MP’s voted again, this time on a motion to prevent a “no-deal” Brexit.  It passed with a count of 312 to 308.  Simply put, they want Brexit, just not Theresa May’s deal. 

However, as per the EU commission, Article 50 is a contract and once triggered, cannot be unilaterally reversed.  The UK may have voted not to leave the EU without an agreement, but they also need to convince EU officials to grant them an extension.   What happens if the EU leaders say “no?”  Chaos, for sure. There are reports that some European leaders are somewhat disgruntled with the UK government’s management of the file.  EU President Donald Tusk indicated that he was open to a long extension, which many believe is three months.

Brexit is an issue for Canada and the Canadian dollar because the UK is Canada’s third largest trading partner.  Canada has a trade agreement with the EU but not the UK which means a “no-deal” Brexit could be disruptive to the domestic economy.

Despite that, the Canadian dollar is having a good week. Part of the reason is last week’s robust domestic employment report Canada which contrasted sharply with the US nonfarm payrolls data.   The far weaker than expected US nonfarm payrolls report sparked a wave of US dollar selling against the major G-10 currencies.  The weakness may have been a weather-related blip, but it was enough to encourage traders to book some profits-and they did, giving the Loonie an added lift.

More US dollar sellers emerged this week thanks to an improvement in global risk sentiment.  US Trade Representative Robert Lighthizer told the Senate Finance Committee the US/China trade talks could be in the final weeks.  Earlier, President Trump talked about a” signing summit at his Mar-a-Lago estate.  Even better, for the Canadian dollar at least, Mr Lighthizer suggested that the US could remove tariffs on Canadian steel and aluminum. The downside is the tariffs would be replaced by quotas.

A sharp spike in oil prices fueled this week’s Canadian dollar gains.  West Texas Intermediate, the North American crude benchmark price, surged to $58.45 from $54.50 on Friday, an increase of 7.2%.   Oil traders liked the apparent progress in the US/China trade talks in the belief that a trade agreement would boost global economic growth and increase crude demand.  Prices got another boost by Saudi Arabia’s promise to reduce April oil production to 7.0 million barrels per day. Venezuela’s production issues added another layer of support as did the US administrations threat to repeal exemptions to Iran oil sale sanctions.

USDCAD traders may also be re-evaluating last week’s Bank of Canada monetary policy statement.  The Bank took a dovish tilt due to slowing momentum in the global economy and the weaker than expected domestic growth in the fourth quarter.   However, Deputy Governor Lynn Patterson attributed that weakness to temporary factors like the US government shutdown and trade tensions, particularly the US/China discussions.  She said a “successful resolution of trade tensions would remove a significant source of uncertainty and provide a major lift.”  The BoC expects “Canadian economic growth to pick up later in the year, supported by ongoing strength in employment and rising wages.”  More telling, Ms Patterson described the policy interest rates as below its neutral range, implying that the neutral rate is still the Bank’s objective.  Higher domestic rates will lead to further Canadian dollar gains.

Nevertheless, the Canadian dollar outlook doesn’t matter this weekend.  The only concern is if the Leprechaun’s pot contains gold or Loonie’s.  As long as it has one of the two, Irish-Canadian’s and Irish Canadian wannabees will enjoy St Patrick’s Day.