The Canadian dollar is starting today’s Toronto session on a negative note, undermined by broad U.S. dollar weakness, international trade threats and lower oil prices. It is not alone. The G-10 majors failed to recoup much, if any of yesterday’s losses and have opened near yesterday’s closing levels.
The ongoing threat of a full-blown U.S./China trade war, President Trump’s threats to tax car imports from the European Union and a surging US economy have combined to support the U.S. dollar.
The Canadian dollar got some support from the Bank of Canada (BoC) yesterday. It didn’t last. The BoC raised its benchmark overnight rate to 1.5% from 1.25%. The bank justified the move by saying that the economy "continues to operate close to its capacity." It forecast Q2 gross domestic product to expand by 2.8% and said that business investment is growing. The bank added that "inflation is expected to edge up further to about 2.5%"
USD/CAD was sold on the news. Prices dropped from $1.3140 to $1.3066, but the move didn’t last. Better-than-expected U.S. Producer Price Index data reminded traders that U.S. interest rates were going higher and perhaps faster than originally expected.
At the same time, President Trump was at the NATO summit in Brussels and acting somewhat belligerently. He accused NATO members of not paying their fair share and questioned Germany’s reliance on Russian gas.
Wall Street was under pressure because of the China/U.S. trade tensions and plummeting oil prices, which exacerbated negative sentiment and underpinned the greenback.
The U.S. dollar was sold, and the Canadian dollar went along for the ride. USD/CAD climbed from $1.3065 to $1.3217 overnight and started today’s Toronto session at $1.3200.
The BoC quarterly Monetary Policy Report (MPR)provided an upbeat outlook for the Canadian economy, and it upgraded GDP growth projections for 2019 and 2020. Normally, it would suggest Canadian dollar demand from foreign investors chasing higher yields. It didn’t happen because of ongoing trade tensions.
The MPR blamed uncertainty around the future of the North America Free Trade Agreement (NAFTA) for causing companies to delay investment spending or for shifting the spending to the United States. The U.S. tariffs on Canadian steel led to a bigger negative bias in the bank's forecasting models.
Global trade tensions will be a constant them at least until the end of August. That’s when the proposed U.S. duties on $200 billion worth of China imports take effect. There is a glimmer of hope for a solution. Senior Chinese and U.S. trade officials are still talking. The U.S. government and China’s ZTE corporation have come to terms, and the company will be able to resume operating in the U.S., proving the U.S. and China can work together.
Modestly improving risk sentiment resulted in Asia and European equity markets posting gains, and Wall Street is poised to open in positive territory. U.S. Consumer Price Index data may provide additional support to the greenback if it is stronger than expected. The Canadian dollar is likely to consolidate yesterday’s losses in a USD/CAD range of $1.3160-1.3240 range.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
