There is an economic data vacuum in Canada this week and the upcoming data next week is second-tier. The Bank of Canada said that it was "data-dependent" and so a data void eliminates a directional bias from the USD/CAD trading environment. However, nature and FX traders abhor a vacuum, so they seek direction elsewhere.
Traders are keying in on global trade developments and, as usual, the U.S. interest rate outlook. Global trade is front and centre again today. This time the adversary is not China but the European Union (EU).
E.U. Commission President Jean-Claude Juncker and E.U. Trade Chief Cecilia Malmstrom are meeting with President Trump in Washington today, at 1:30 pm EDT. Juncker is trying to head off the imposition of tariffs on cars imported from the E.U. Trump is upset that the EU slaps 10% duties on cars imported from the US, while the US only charges 2.5%. The E.U. counters that the U.S. charges a 25% tax on trucks and pickups from the E.U. while they only charge 10%. President Trump wants all the tariffs gone.
Last night he tweeted: "The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers, and Subsidies! That would finally be called Free Market and Fair Trade! Hope they do it, we are ready - but they won’t!"
The E.U. will respond to U.S. tariffs with tariffs of their own. Malmstrom said the E.U. is ready to impose tariffs on $20 billion of U.S. imports if Trump follows through on his threat.
The Canadian dollar is unlikely to appreciate in an escalating trade war environment, and it has trade issues of its own. President Trump said he was close to a "dramatic" deal with Mexico. He didn’t include Canada in the statement, implying a bilateral trade agreement, not the North American Free Trade Agreement. The new Mexican president reportedly wants a quick deal so that he can focus on domestic issues. U.S. and Mexican trade representatives are meeting this week as are Canadian and Mexican officials. However, Canada and the U.S. are not talking which doesn’t bode well for NAFTA.
The Canadian dollar has been rangebound since the middle of June trading in a USD/CAD range of $1.3060 to $1.3385. The Bank of Canada raised interest rates on July and delivered an optimistic outlook for the domestic economy. It pointed out that the economy was operating at "close to capacity" and inflation was rising. It also warned of further rate increases saying: "Governing Council expects that higher interest rates will be warranted to keep inflation near target and will continue to take a gradual approach, guided by incoming data."
Canadian dollar gains on economic data will continue to be tempered by ongoing trade fears and worries about a NAFTA deal collapse.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
