The Canadian dollar came under renewed pressure overnight. It was not alone. The U.S. dollar surged against the G-10 major currencies in Europe after a relatively quiet Asia session. The Canadian dollar was adrift in a narrow range in early Asia trading. It ignored an AUD/USD rally after Australia posted surprisingly strong employment data.
The Canadian dollar couldn’t overlook China developments. The Shanghai Shenzhen CSI 300 index dropped 0.09% to 3,428.34 which was modest, but the focus was on the Chinese yuan. USD/CNY fixed at a one-year low. The move was partly due to the broad US dollar strength. However, many believe that it was a deliberate action by the Peoples Bank of China (PBoC) to help mitigate the impact of U.S. tariffs.
The Canadian dollar followed the major G-10 currencies lower against the greenback. Trade fears have returned with a vengeance. U.S. President Trump is reportedly willing to use the threat of tariffs on auto imports as a way to extract trade concessions from U.S. trading partners. The European Union has responded to the threat of tariffs by preparing a list of U.S. imports that will be hit with duties.
The threat of tariffs on cars imported into the U.S. has undermined the Canadian dollar. CIBC economists suggest that auto tariffs could cut Canadian car production by 900,000 units. TD economists predict tariffs could lead to 160,000 job losses. If that happens, the demise of the North America Free Trade Agreement (NAFTA) is likely to follow.
On Wednesday, President Trump said that the U.S. might work a trade deal with Mexico first and when that’s done, negotiate with Canada. Whether this tactic is fallout from Prime Minister Justin Trudeau’s gamesmanship at the G-7 meeting is anyone’s guess.
Trade threats are just one issue undermining the Canadian dollar. Another critical factor is that US interest rates are going higher with at least two more rate increases expected in 2018. The Bank of Canada just raised rates but FX traders do not believe the BoC will continue to hike rates if the U.S. puts tariffs are car imports. The BoC may insist that it is "data-dependent", but they are realists as well.
The Canadian dollar is also under pressure because of international issues. The European Central Bank (ECB), led by President Mario Draghi, is still insisting that ECB monetary policy needs to be accommodative. They said that euro rates will not rise until the summer of 2019 at the earliest. The U.S. may have increased rates four times between today and next summer. The subsequent decline in EUR/USD has weighed on the rest of the G-10 currencies, and the Canadian dollar was caught in the middle.
There isn’t any domestic data today which ensures that U.S. dollar moves will dictate Canadian direction.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
