The Canadian dollar has largely been sidelined in FX trading since markets closed last Friday. It is also the only major G-10 currency to have recorded a gain during that period, rising 0.32%. The Canadian dollar’s outperformance can be attributed to the mix of a somewhat hawkish Bank of Canada interest rate outlook and improved sentiment around the North America Free Trade (NAFTA) negotiations.
The news that Mexico and the U.S. were close to a deal on autos was somewhat diminished by yesterday’s announcement that the U.S. Commerce Department decided to levy tariffs on Canadian newsprint of between 8% and 16.8%. Canada’s Foreign Affairs Minister Chrystia Freeland blamed the tariffs on bipartisan testimony, adding that the Canadian government would work to "defend this vital sector." In layman’s terms, she was saying "Sorry, nothing we can do."
Arguably, the spate of reasonably strong Canadian economic reports along with the Bank of Canada’s optimistic outlook for the Canadian economy suggests the Canadian dollar should be trading around the 80.00 cent level. The reason: it doesn't rest solely on the shoulders of the NAFTA discussions. President Trump’s apparent dislike of Prime Minister Trudeau and Trump’s preference for bilateral trade deals heightens the risk that the trade negotiations will fail. The fact that the U.S. denied Canada’s request to join the Mexico/U.S. auto talks this week is further evidence of the risks.
The Canadian dollar is vulnerable to continuing U.S. dollar strength. The U.S. dollar index which has been trapped in a 93.80-94.890 range broke through the top in overnight trading. If it can decisively break above the 95.60 area, it would signal that another US dollar is occurring.
If so, the Canadian dollar will come under renewed selling pressure.
The Bank of England (BoE) policy meeting yesterday, provided the U.S. dollar with some support. The BoE raised interest rates, as expected, by 0.25%, making the Bank rate 0.75%. The bank left its quantitative easing program as is, in another "as expected" development. However, it was Governor Mark Carney’s remarks at his press conference and then again overnight that led to GBP/USD selling and broad U.S. dollar strength against the major currencies. At his press conference, the governor hinted that the pace of future rate increases could be slower than previously anticipated. GBP/USD dropped from $1.3127 to $1.3017 on the statement. Earlier this morning, in a BBC interview, Carney said that No Brexit risks were "uncomfortably high." GBP/USD extended yesterday’s losses to $1.2977. GBP/CAD sellers contributed to a move higher in the Canadian dollar.
This morning’s U.S. employment report was forecast to show a gain of 190,000 new jobs and a drop in the unemployment rate to 3.9%. Recent U.S. data implies an upside risk to the forecasts. If so, the Canadian dollar would sink.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
