July is rapidly coming to an end and so is a lot of pessimism around the Canadian dollar. Positive developments around the North America Free Trade Agreement (NAFTA) talks helped. Late Friday, Chairman of the White House Council of Economic Advisors Kevin Hassett talked of "absolutely amazing" progress in the NAFTA negotiations, speculating that a deal could be reached by the fall.
CBC News quoted the Mexican Economy Minister Guajardo saying that of the 30 NAFTA chapters, nine are closed, and 10 are almost closed. Some of the optimism stems from last week’s E.U./U.S. trade talks and President Trump’s agreement to suspend auto tariffs for during negotiations. However, Canadian Foreign Minister Chrystia Freeland says the negotiators are still working on the autos and auto parts file.
The somewhat improved tone to the trade talks has provided a bit of support to the Canadian dollar as trade uncertainty was a major uncertainty for the Bank of Canada monetary policy committee members. As the uncertainty dissipates, they are free to concentrate on economic developments, and the domestic economy appears to have rebounded in May. The proof is in the pudding and in Tuesday’s gross domestic product report. Forecasters expect May GDP to rise 0.3% compared to April's 0.1% gain, in part because it is payback from the weather-related poor showing in April.
The Canadian dollar is getting an added boost from firm oil prices. WTI oil may be below its recent $75.25/barrel peak, but prices are still above $70.00/b today. Pending sanctions against Iran and that nations threat to disrupt oil shipments through the Strait of Hormuz have more than offset the bump in production by the Organization of the Petroleum Exporting Countries (OPEC).
The Canadian dollar will be at the mercy of U.S. dollar price swings that may occur following this week's central bank meetings. On Tuesday, the Bank of Japan policy meeting statement will be released. Japanese rates will be left unchanged, but there is growing concern that the BoJ may adjust their yield curve management program. Many analysts see such an adjustment as a prelude to the end of the ultra-easy monetary policy. If so, USD/JPY would come under pressure which could lead to selling of CAD/JPY.
On Wednesday, the Federal Open Market Committee policy statement will be released. They are expected to leave interest rates unchanged, but the statement may point to a September rate hike. There isn’t a press conference scheduled, and this meeting is unlikely to disrupt FX markets.
August 2 is "Super-Thursday" in the U.K.. The Bank of England (BoE) interest rate decision, Quarterly Inflation Report and Governor Mark Carney press conference are due. This meeting should be interesting. The odds are over 80% that the BoE raises interest rates but ongoing Brexit fears may limit GBP/USD gains.
Today, Canadian dollar traders will be taking direction from U.S. Pending Home Sales data and Wall Street developments.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
