The advertising slogan for an energy beverage says "Red Bull gives you wiings." The Canadian dollar may have opened a can or two because it got "wiings" yesterday. USD/CAD plunged from yesterday’s peak of $1.3168 to an overnight low of $1.3027, crashing through key support levels and turning sentiment from bullish to bearish.
The Canadian dollar was under a lot of pressure since April because of rising global trade tensions and concerns that the North American Free Trade Agreement would be scrapped. At the same time, the Canadian economy was robust. The unemployment rate was falling, the output gap was closing, and inflation was rising. The Bank of Canada (BoC) need to raise interest rates, and it did, on July 11. However, traders believed that although the BoC wanted to raise rates further, the threat of auto tariffs and the collapse of NAFTA was preventing them from doing so, which undermined the Canadian dollar.
Yesterday, things took a turn for the better, at least on the trade front. European Union (E.U.) Council President Jean-Claude Juncker and the E.U. Chief trade negotiator, Cecilia Malmstrom met with President Trump in Washington. They were there to see how they could avert a trade war. FX traders were not expecting any positive developments from the meeting, in part because of Trump himself. He had tweeted that he didn’t think much would come from the meeting.
He was wrong. The E.U. caved to Trump’s demands, and the president tweeted up a storm, saying "Great meeting on Trade today with @JunckerEU and representatives of the European Union. We have come to a very strong understanding and are all believers in no tariffs, no barriers and no subsidies. Work on documents has already started, and the process is moving... ...along quickly. European Union Nations will be open to the United States and at the same time benefiting by everything we are doing for them. There was great warmth and feeling in the room - a breakthrough has been quickly made that nobody thought possible!”
Not to be outdone, Canadian and Mexican trade officials got into the act. Canadian Foreign Affairs Minister Chrystia Freeland and Mexico’s President Andres Obrador were all smiles yesterday when they jointly announced that they were committed to a trilateral NAFTA agreement. President Trump was advocating a divide-and-conquer strategy whereby the U.S. would hammer out a trade deal with Mexico first and then Canada at a later date. Yesterday’s development suggests that his approach isn’t going to work.
However, the real "icing on the cake" that sparked the Canadian dollar rally was President Trump’s decision to forego auto tariffs on E.U. imports. USD/CAD traders assumed that Canadian car tariffs are exempt as well. That may not be the case, and if so, further Canadian dollar gains may be limited.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
