Canadian dollar direction is at the whim of U.S. dollar sentiment. There isn’t any domestic data due this week, but last Friday’s retail sales and consumer price index results will underpin the currency. Bank of Canada Governor Stephen Poloz emphasized that they were "data-dependent not headline-dependent" during his monetary policy press conference. Traders are pricing in one more rate Canadian rate hike in 2018.
The Canadian dollar bounced erratically in a USD/CAD range of $1.3142-$1.3190 overnight an in early Toronto trading. FX markets have drifted cautiously into a risk-seeking environment due to developments in China. Chinese authorities appear to be attempting to stimulate economic growth. On Monday, they injected banking liquidity through its medium-term lending facility. That move was followed by another higher USD/CNY fixing rate and a statement from the State Council hinting at new stimulus programs.
Asia and European equity indices rallied on the news. However, FX markets stayed subdued until New York opened when the US dollar started to slide. The shift to risk seeking sentiment is evident as U.S. equity futures point to a positive opening on Wall Street, support by yesterday's better than expected Alphabet results.
EUR/USD traders shrugged off disappointing euro-zone Purchasing Managers Index reports. The single currency rebounded from the overnight low of $1.1653 to $1.1712 in New York trading. That rally boosted the Canadian dollar in the process.
This morning’s mild risk-seeking environment is fragile. The U.S. Trade Representative will be discussing imposing tariffs on another $16 billion worth of Chinese imports, which is the second round of the $50 billion in tariffs announced earlier. Also, the weakening of the Chinese currency flies in the face of President Trump’s complaint suggesting that China was deliberately weakening their currency to gain a trade advantage.
China isn’t the only source of market risk. Trump aimed at Iran on Monday. Iran has threatened to halt oil shipments through the Strait of Hormuz if the U.S. prevents them from selling oil.
The Canadian dollar, like the other commodity bloc currencies, is vulnerable to a ratcheting up of US/China trade tensions. A slowdown in global growth would lower demand for Canadian raw materials exports. The Organization for Economic Cooperation and Development (OECD) said yesterday that Canada needs to reduce corporate taxes to combat rising trade risks.
Trade risks aside, the Canadian dollar has a lot going for it. Existing home sales are strong. Manufacturing sales rose 4.1% in June and yesterday. May Wholesale Sales handily beat forecasts rising 1.2%, m/m. (forecast 0.3%). The blowout retail sales and inflation reports released last Friday point to strong economic growth. Normally, these robust economic reports would lead to substantial gains in the Canadian dollar.
However, the risk of the North American Free Trade Agreement collapsing and the ongoing tit-for-tat tariff exchange between the U.S. and Canada limits the Canadian dollar’s upside.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
