Canadian retail sales and inflation data surprised to the upside this morning, and this has the Canadian dollar rallying on the positive news, which is likely to keep pressure on the Bank of Canada to raise rates again this year.
Prior to the data this morning, the Canadian dollar continues to drift lower. The sentiment is overwhelmingly bearish as it appears that the 24-year-old North America Free Trade Agreement is on life-support. President Trump kicked off a renegotiation of the trilateral agreement over a year ago. Since then, Trump has bargained in bad faith by imposing tariffs on softwood lumber, steel and aluminum, evidence that he would prefer the agreement to be scrapped. An attempt to get a ‘stop-gap deal done in April at the summit of the America’s in Peru failed. The Mexican elections in June have stalled talks.
Earlier this week, President Trump said that he might prioritize a bilateral deal with Mexico, He said he’s building a good relationship with Mexico’s President Andre Obrador. Prime Minister Justin Trudeau, in a self-serving, chest-thumping attempt at looking like a strong leader, embarrassed the U.S. President at the G-7 meeting in Montreal. Those schoolboy antics irked the notoriously thin-skinned president and encouraged him to exact revenge against Trudeau which may take the form of a torn up NAFTA deal.
The Canadian dollar is also under pressure to global trade developments. The U.S./China trade spat is at risk of becoming a full-blown war. Today, President Trump took another shot at China. He said he is "ready to go" with another $500 billion in new trade tariffs on Chinese goods imported into the U.S., according to CNBC. On July 19, White House Economic Advisor Larry Kudlow claimed China President Xi Jinping was blocking trade talks which China denied.
Yesterday afternoon, President Trump complained about the Fed raising interest rates. He said it was hurting America because the US dollar was getting stronger and the "Chinese currency was dropping like a rock." The U.S. dollar sank on those comments, but the move was reversed moments later.
Today, China fixed the USD/CNY rate at 6.7671, nearly 1% higher than yesterday. Part of the move was to counter broad US dollar strength, but some traders believed China was deliberately devaluing the currency to counter trade tariffs.
The U.S. threat to NAFTA and global trade continues to undermine the Canadian dollar. The Bank of Canada is adamant that monetary policy is data dependent and implied that as long as the trade issues are only concerns not facts, domestic rates will be going higher. FX traders believe that the risk of a trade deal collapse warrants selling Canadian dollars.
Canada Retail Sales and inflation data are due this morning. There is a risk of an upward surprise to the reports which will lift the Canadian dollar. However, the gains may be fleeting due to rising trade tensions
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
