The first day of Summer 2018 arrived at 6:07 a.m. in Toronto. Teachers and school kids will be cheering the news as they begin their countdown to summer holidays. FX traders will be singing "I’m gonna raise a fuss, I’m gonna raise a holler" because they have the "Summertime Blues" (originally released by Eddie Cochrane, August 1958)
They can thank U.S. President Donald Trump and his aggressive trade strategy for their malaise. Canadian dollar traders have been dealing with uncertainty over the North American Free Trade Agreement and global trade war threats for the past year. Those concerns are over and above uncertainties stemming from the Bank of Canada interest rate policy, the pace of U.S. interest rate increases and the Organization of the Petroleum Exporting Countries’ new oil pricing strategy.
The Bank of Canada delayed raising interest rates in March of this year blaming a lack of clarity around economic growth prospects because of global trade tensions. Those tensions have gotten worse. The U.S. is in a tit-for-tat tariff war with China, the European Union, Canada and as of this morning, India. The cloud of uncertainty reduces the Bank of Canada’s ability to raise interest rates.
The U.S. Federal Reserve is under no such constraints. It can raise interest rates and just did, last week. That’s not all, the Federal Open Market Committee members predicted the need for two more rate hikes in 2018. The widening spread between U.S. and Canadian interest rates (in favour of the U.S.), has undermined the Canadian dollar.
The loonie has been receiving a diminishing benefit from oil prices. Part of the reason is that Canada’s main crude export, Western Canada Select, trades at a discount of CAD$32.62. That means Canadian oil exporters only earn U.S. $41.00/barrel, a far cry from the current price of WTI oil ($65.54/barrel)
The 174th (ordinary) OPEC meeting begins in Vienna today and concludes tomorrow. There have been many reports that the cartel wants to raise production. Oil traders fear that a rise in production will reduce prices and that sentiment is putting downward pressure on the Canadian dollar.
There hasn’t been any top-tier Canadian economic data this week which has contributed to the negative sentiment. That changes on Friday with the release of Consumer Price Index and retail sales reports. If the data is better than expected, it may lead to a profit taking rally in the Canadian dollar. However, longer term negative sentiment suggests that there will not be any shortage of Canadian dollar sellers on strength.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
