The Canadian dollar has traded quietly for the past two days. USD/CAD has been stuck in a $1.3111-$1.3172 range while traders bide their time until the release of the U.S. and Canadian employment reports on Friday. Canada is expected to gain 17,500 jobs, a vast improvement from the 1,000 jobs lost in May.
Arguably a weak report will have a more significant impact on USD/CAD trading than robust data. That’s because a strong report is expected and it won’t affect the Bank of Canada policy rate decision at all. However, a weak report causes some problems. It may not have any bearing on next Thursday’s Bank of Canada policy decision, but it could set the stage for another "dovish hike" scenario.
The U.S. non-farm payrolls report is forecast to rise 195,000, below the 223,000 gain seen in May. Traders will be more focused on the Average Hourly earnings component, looking for an upside surprise to the 2.88% forecast as that implies higher inflation. Weaker-than-expected data should only have a limited impact on trading because of the trade war threat.
On July 6, U.S. tariffs on $34 billion of Chinese imports take effect. China said it would retaliate. President Trump upped the ante and said that if China reacts, the U.S. will put tariffs on an additional $200 billion worth of Chinese goods.
A full-blown trade war will fuel safe-haven demand for Japanese yen and Swiss francs. Not the Canadian dollar. The U.S. dollar would rally, and the Canadian dollar will be collateral damage.
The U.S./China trade spat, the U.S. dollar threat to the North American Free Trade Agreement and the U.S. imposition of tariffs on Canadian steel, aluminum and softwood lumber suggest that the Canadian dollar should be a lot weaker than it is today. It may be getting a bit of support from sky-high oil prices.
West Texas Intermediate (WTI) is trading at levels last seen in November 2014. President Trump pulled the U.S. from the Joint Comprehensive Plan of Action (Iran Nuclear Deal). Concerns of a crude oil shortage in an environment of rising demand have propelled WTI from $58.10/barrel in February to $75.20/b on Tuesday, a 29.4% gain.
Today’s U.S. economic reports are second tier in nature and include Initial Jobless Claims (forecast 225,000), and Institute for Supply Management Non-Manufacturing Purchasing Managers' Index (forecast 58.3). Stronger than expected data will support the booming U.S. economy narrative and lift the U.S. dollar. There isn’t any data from Canada.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
