The Canadian dollar is preparing for a data-fueled rally, but it is constrained by a short, strong leash regarding the North American Free Trade Agreement (NAFTA). Traders are finding it very difficult to become enamoured with the currency when it is on the cusp of a nasty divorce from its largest trading partner. That sentiment was on full display in Asia, overnight.
A National Post article headlined with "Canada rejected in bid to be part of high-level NAFTA talks between Mexico and U.S.: sources". The Canadian dollar sank. USD/CAD soared to $1.3025 to $1.3095. It slowly retreated during the European session and is trading in Toronto right where it closed on Monday.
The article suggests that U.S. Trade Representative Robert Lighthizer dislikes Canadian Foreign Affairs Minister Chrystia Freeland, which is one issue. More importantly, Lighthizer believes he can strike a separate trade deal with Mexico and then use that as leverage against Canada. President Trump is on record stating he prefers bi-lateral agreements over NAFTA.
The Canadian dollar could enjoy a sharp but short-lived rally today if both domestic data and month end portfolio re-balancing flows cooperate. Canada May Consumer Price Index is expected to rise 0.4% compared to April’s 0.1% gain. A better-than-expected result would nearly confirm that the Bank of Canada would raise rates again in September. However, lingering NAFTA concerns should temper the enthusiasm. It is also month end. The U.S. equity markets outperformed the Canadian market which suggests Canadian dollar buying for portfolio re-balancing requirements.
At the same time, the impact from today’s U.S. data and the month end flows may be fleeting. The Federal Open Market Committee meeting statement is due tomorrow. Traders will quickly shift their focus to the U.S. interest rate outlook and be alert for signs of an increase in the pace of rate hikes. The odds for a rate increase at this meeting are close to zero, but markets will be looking for tweaks in the language and tone of the statement. The could upgrade their inflation outlook and reinforce the prospect for a September rate hike. If so, that would boost the U.S. currency and undermine the Canadian dollar.
The Bank of England policy meeting and Quarterly Inflation Report (QIR) is Thursday. They are widely expected to increase rates by 0.25%. However, heightened "hard" Brexit concerns could lead to a "dovish" hike scenario. Sizeable GBP/USD price swings could lead to either Canadian dollar demand or sales, depending upon the direction.
The countdown to Friday’s U.S. employment report could lead to diminished FX volatility after the FOMC meeting. Non-farm Payrolls are forecast to rise 190,000 with average hourly earnings rising 0.3% from 0.2%. A strong report would undermine the Canadian dollar.
Today’s U.S. personal consumption/Expenditure data is expected to be unchanged but U.S. dollar supportive.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
