The Canadian dollar dodged a bullet on Friday. USD/CAD was trading with a bid and threatening to retest the June peak of $1.3387. It was saved by data. A better-than-expected Retail Sales report and a higher-than-forecast inflation reading sparked a surge in Canadian dollar demand.
USD/CAD tumbled from $1.3245 (pre-data) to $1.3112 shortly afterwards. June CPI was forecast to rise 2.3%, y/y but posted a 2.5% gain. May retail sales rose 2.0% (forecast 1.0%), erasing the stench of the weak April data. Bank of Montreal economists point out that the domestic data still lags the U.S. performance. The economic reports raised the odds for another Bank of Canada (BoC) rate hike in September.
Canadian dollar direction will be at the mercy of U.S. dollar sentiment as there isn’t any domestic economic data released this week. Traders will be focused on global trade, new North American Free Trade Agreement trade talks that begin on Thursday, oil prices and Wall Street earnings reports.
President Trump’s threat of additional tariffs on $500 million worth of Chinese imports unsettled markets. On Friday, the Peoples Bank of China (PBoC) fixed the USD/CNY rate at 6.7671, sharply higher from the previous day’s "fixing." The low "fix" raised concerns that China was devaluing its currency to counter US tariffs. On the weekend, China said that they are not weakening their currency and, coincidentally, USD/CNY was fixed slightly lower on Monday.
At the same time, China announced that it was opening a probe of stainless steel imports from Japan, European Union, Korea and Indonesia. That news kept FX traders on the sidelines in Asia.
The Canadian dollar consolidated Friday’s gains in a USD/CAD $1.3116-1.3154 range overnight, with plenty of action on both sides of the band. Canadian dollar losses will be capped by rising odds that the Bank of Canada raises interest rates in September. Last week, global trade tensions escalated. President Trump admitted he thought a trade deal with Mexico would be done ahead of Canada which undermined the Canadian dollar. Those concerns have not gone away.
Mexico elected a new President, and so far he has not annoyed Trump. Justin Trudeau attempted to score points at the expense of the U.S. President after the G-7 meeting, and Canada’s negotiating position has weakened as a consequence. The new Mexican president is busy mending fences with the U.S. while Trudeau is bashing them. Prime Minister Trudeau denied comments from former Prime Minister Stephen Harper that he was using the NAFTA talks to for political gain.
NAFTA concerns aside, BoC Governor Poloz believes the domestic economy is growing as forecast which necessitates higher domestic interest rates. A break below the USD/CAD $1.3110 area will extend USD/CAD losses to $1.2950.
Better than expected U.S. Existing Home Sales data could underpin the greenback this morning, limiting Canadian dollar gains, in the process.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
