The Canadian dollar came under pressure because of broad strength in the U.S. dollar. The greenback demand stems from a variety of sources. Aggressive and hostile U.S./China trade war rhetoric has dissipated in the past few days after the mutual exchange of tariffs, but the lull is unlikely to last. There is lingering demand for U.S. dollars from last Friday’s non-farm payrolls report. Concerns about a bump higher in the unemployment rate and a dip in average hourly earnings have been explained away by a rise in unemployed workers seeking work.
The U.S. Federal Reserve is on track to raise interest rates at least twice more in 2018 which contrasts sharply with other major central bank policies. The European Central Bank is on hold until the last quarter of 2019. The Reserve Bank of Australia and the Reserve Bank of New Zealand are two other policymakers leaving rates unchanged until late 2019. The Bank of Japan doesn’t have any plans to end its ultra-easy monetary policy. The Bank of England is expected to raise rates in August, and the Bank of Canada will be hiking them tomorrow.
On Wednesday, the BoC releases its quarterly Monetary Policy Report (MPR). Governor Stephen Poloz was relatively optimistic in his outlook for the Canadian economy, in a recent speech. Improvements in the pace of domestic inflation, employment and Gross Domestic Product growth suggest that the MPR forecast may be upgraded. The North American Free Trade (NAFTA) negotiations is an obstacle. However, Poloz said that policy decisions could not be made from headlines but only economic data. The Canadian dollar will be vulnerable to negative NAFTA headlines, which for the time being, will slow gains but not eliminate them.
Canada Housing Starts and Building Permits data will be released this morning. Building Permits are expected to rebound from April’s weather-related slowdown, which should provide the Canadian dollar with a little more support.
The Canadian dollar is not getting much benefit from sky-high oil prices. West Texas Intermediate crude is trading at pre-oil crisis levels, last seen in November 2014. That has a lot to do with domestic supply and distribution issues. The bulk of Canada’s crude comes from Fort McMurray, Alberta and the province is land-locked. Producers rely on rail and pipelines for shipping, and both distribution networks are at or near capacity. A power failure at Syncrude has knocked 355,000 b/day out of production until the end of July.
The Canadian dollar is expected to trade within a $1.3090-$1.3160 range today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
