It’s official. The US/China Trade War of 2018 has begun. At 12:01 am, Washington time, $34 billion worth of China imports were slapped with 25% tariffs when they land on American shores. China reciprocated. $34 billion of U.S.-dollar imports faced new taxes.
And the FX market yawned. The Canadian dollar drifted aimlessly in a narrow $1.3125-40 range. The rest of the G-10 majors traded in a similar fashion. Traders viewed the trade war story as "old news" and preferred to focus their attention on the upcoming U.S. employment report. Non-farm payrolls were forecast to rise 195,000 for June with average hourly earnings predicted to hold steady at 3.8%.
The U.S. trade deficit is expected to narrow to $43.7 billion from $46.2 billion. A strong report is expected, suggesting that the impact of weaker than expected data could be sizable. The U.S. dollar has been in demand for the past month and may be ripe for a profit-taking/correction selloff.
The U.S. added 213,000 jobs, better than expected, but wage gains were weak and surprisingly the unemployment rate went up to 4%.
It is a big day for top-tier data in Canada. Merchandise Trade, Employment and Ivey Purchasing Managers Index data are due. Employment was forecast to rebound and show a gain of 17,500 jobs while the unemployment rate will be unchanged. The trade report could have the biggest impact on the currency if exports are a lot weaker than expected. Exports are a key metric in the Bank of Canada monetary policy deliberations.
Canada added 31,800 jobs, much better than expected. Wages were up as well. However, the jobless rate went up to 6% surprisingly.
The outlook for the Canadian dollar is negative. President Trump has demonstrated his willingness to slap tariffs on friends and foes. His loathing of the North America Free Trade Agreement (NAFTA) is well documented. The fact that he levied tariffs on Canadian steel, aluminium and softwood lumber imports, even as the NAFTA re-negotiations are taking place raises the risk that the President will walk away from the agreement.
He has threatened to put 25% tariffs on imports of cars. If he follows through, it will devastate the Ontario economy and could cost as many as 160,000 jobs. High oil prices aren’t providing much support to the Canadian dollar. Canada has trouble exporting the crude due to a lack of pipeline capacity. Also, their largest export market is the U.S. and America is the largest oil producing nation in the world.
The Bank of Canada is poised to raise interest rates next Thursday. A 0.25% increase is already baked into the current level of the Canadian dollar. Bank of Canada Governor Stephen Poloz has admitted that rising global trade tensions have clouded their economic outlook. There is a real risk that a dovish policy statement will follow a rate hike. If so, Canadian dollar gains would be limited.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
