The Canadian dollar could not generate much upside traction overnight, despite a slight thaw in global risk aversion sentiment. The Peoples Bank of China (PBoC) issued a paper suggesting that made a case for a cut in the Reserve Rate Ratio’s (RRR) That is a simulative measure and Asia markets reacted like it had already occurred. Asia Equity indices climbed, led by gains in the Nikkei 225 and the Australian dollar.
The Canadian dollar drifted higher, but the gains were limited. USD/CAD sentiment is overwhelmingly bullish. The U.S. tariffs on imports of Canadian steel, aluminum and softwood lumber have underpinned the USD/CAD since they were announced. President Trump’s threats to put tariffs on cars, agricultural products and dairy products have made things worse, especially in the context of the North American Free Trade Agreement renegotiation. The president has often said that he would tear up NAFTA, and his latest actions suggest the agreement in on a conveyer belt to a shredder.
The U.S. Federal Reserve Open Market Committee (FOMC) has added to the negative Canadian dollar sentiment. Last week’s FOMC policy statement, press conference and updated economic projections underscored the differences in the Bank of Canada and Fed monetary policy.
The lack of clarity around trade hampers the Bank of Canada's ability to raise domestic rates. They are unwilling to increase the cost of borrowing in the face of heightened economic uncertainty coming from the U.S. The Fed does not have the same constraints. They are projecting two more interest rate hikes in 2018.
The long-term Canadian dollar technical outlook took a turn for the worse two weeks ago. USD/CAD broke the downtrend line from the January 2016 peak of $1.4675, which sets the stage for additional gains. A decisive break of $1.3370 would target $1.3680
The Canadian dollar could get a reprieve on Friday if Canada retail sales and inflation reports are stronger than expected. If the reports are weaker than expected, they could be the proverbial "straw that broke the camel’s back," and trigger a fresh wave of Canadian dollar selling.
Another source of woe for the Canadian dollar is oil prices. The Organization of Petroleum Exporting Countries (OPEC) meets on Friday in Vienna. The debate about keeping the existing production cuts is already raging. One camp, led by Iran wants to leave things as they are. The other camp, led by Saudi Arabia and Russia, want to raise production. If the Saudi’s prevail, a steep slide in oil prices would undermine the Canadian dollar.
Canadian dollar direction will be dictated by broad U.S. dollar sentiment and Wall Street as there isn’t any major U.S. or domestic economic reports available today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
