The Canadian dollar has a bullish bias. Yesterday, Statistics Canada reported that real gross domestic product (GDP) rose 0.5% in May, beating the 0.4% forecasts and well-above the May result of a 0.1% increase. Even better, the growth spanned 19 out of 20 sectors.
The news comes on the heels of a string of strong economic reports which helps to solidify expectations that the Bank of Canada (BoC) will raise interest rates again, in September. BoC Governor Stephen Poloz emphasized at the post-policy meeting press conference last month, which the Bank was "data dependent not headline dependent." That is important to remember in the face of negative press reports about the North American Free Trade Agreement (NAFTA) this week.
A Bloomberg article this morning said that the U.S. and Mexico were very close to hammering out a deal on autos. Senior trade representatives from both countries are meeting in Washington today. Canada was denied an invitation when it asked to be included.
Canadian dollar moves are not tracking West Texas Intermediate (WTI) oil price swings. WTI dropped nearly 8.0% in July, and the Canadian dollar managed to rise by almost 1.0%. The Canadian dollar was the best performing currency of the G-10 majors in July while the Japanese yen was the worst.
Trade was at the forefront in FX markets overnight, thanks to President Trump. He threatened to boost the planned 10% tariffs on $200 billion of Chinese imports to a punitive 25%. U.S. officials suggest that the threat is just a negotiating ploy to extract concessions from China. So far, the threat is just noise. The tariffs, either 10% or 25% if they are even levied, will not come into effect until after public hearings between August 20-23, and then a comment period that ends August 30.
China’s reaction has been understated. They said they wouldn’t be blackmailed but have allowed their currency to depreciate in what some analysts believe is a tariff defence mechanism.
The Canadian dollar has also been bounced around by the ebb and flow of the U.S. dollar against the major G-10 currencies. The U.S. dollar opened in Toronto on a firm footing, posting against the majors. Euro-zone July Markit Manufacturing PMI data was unchanged at 55.1, as expected. U.K. manufacturing data was a tad weaker at 54.0 compared to June’s 54.3 print. Both reports underpinned the U.S. dollar which drifted higher, the Canadian dollar inched lower, as a result.
U.S. Institute for Supply Management Manufacturing Purchasing Managers Index is on tap later this morning. Forecasts predict a 59.5 result, down from June’s 60.2. The data shouldn’t have any bearing on this afternoon’s Federal Open Market Committee (FOMC) policy statement.
The looming FOMC policy statement is a good enough excuse for traders to sit on the sidelines until it is released this afternoon. If so, the Canadian dollar will stay in a narrow USD/CAD range of $1.2990-$1.3250.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
