USD/CAD - NAFTA Caps Canadian dollar

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Concerns over the North American Free Trade Agreement are back in the spotlight. President Trump said yesterday that the U.S. was not negotiating with Canada. He complained about Canadian tariffs being too high and that barriers were too strong. Trump’s comment that the U.S. and Canada weren’t talking contrasts with the Canadian government’s version of the re-negotiations. Canadian Foreign Minister Chrystia Freeland maintained that the Canadian negotiating team is in regular contact with its counterparts, yet they didn’t say if they were actively negotiating.

The belief that Canada will be asked to sign a "take-it-or-leave-it" NAFTA treaty by the Americans has put a cap on Canadian dollar gains, despite robust domestic economic data and indications that the Bank of Canada will raise rates again in September or October.

A plunge in oil prices has also undermined the Canadian dollar. Western Canada Intermediate (WTI) plunged from $68.40/barrel on Tuesday to $64.45 on Wednesday. Profit-taking ahead of the weekend as lifted prices to $65.83 this morning. Traders are concerned about the recent rise in U.S. crude inventories. On Wednesday, the Energy Information Administration reported crude stocks rose 6.80 million barrels. Earlier, the Organization of the Petroleum Exporting Countries (OPEC) said that production increased by 41,000/barrels per day in July. The issue is future global demand. Traders are worried that the U.S. administrations threat to levy tariffs on another $200 billion worth of Chinese imports will lower global growth and global demand, by default.

The U.S. government triggered a bout of risk aversion with their stance against Turkey. The U.S. is demanding that Turkey release an American pastor that is being held on suspicion he was part of a coup attempt. The first round of sanctions against Turkey sparked a massive drop in the Turkish lira and raised fears that the losses would negatively impact some major European banks. EUR/USD sank on the news but since recovered. The recovery was aided by Qatar promising a $15-billion investment into Turkey. However, yesterday, U.S. National Economic Council Director Larry Kudlow warned of further Turkey sanctions in the coming days. USD/TRY which had dropped after the Qatar news rallied this morning. The fresh contagion fears put a halt to a nascent U.S. dollar retreat against the G-10 currencies.

The U.S. aimed at China, again. The newly appointed U.S. Special Envoy to Iran Brian Hook warned yesterday that the administration would put sanctions on any nation importing Iranian oil. China was not exempt. China imports the bulk of its crude from Iran and India, and South Korea are also large importers.

The threat of new sanctions, contagion risks from prior U.S. actions against Turkey and the hawkish outlook for the Federal Reserve combined to limit Canadian dollar gains.

Canada’s July inflation data will be released today, and it is expected to be unchanged from June. Even if inflation rises more than expected, Canadian dollar strength will be short-lived.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians