The Canadian dollar is struggling to find direction. Its counterpart south of the border doesn’t have that problem. The U.S. dollar has been rising steadily against the major G-10 currencies for a number of months due to a combination of hawkish Fed monetary policy and hostile U.S. trade policies. The Canadian dollar is a victim of them
President Trump levied tariffs on imports of Canadian steel, aluminum and softwood lumber even as the North American Free Trade Agreement re-negotiations were progressing. He has threatened to add 25% tariffs on cars and is actively promoting a deal with Mexico ahead of Canada.
Those policies have sunk the Canadian dollar and were a key reason that USD/CAD touched $1.3385 at the end of June.
Prices recovered, somewhat, after the Bank of Canada raised interest rates and emphasized that monetary policy was data-dependent. The Canadian data has been stellar for the past few months suggesting that while the NAFTA negotiations have spooked FX traders, they have only had a limited impact on the domestic economy.
The Canadian dollar isn’t the only currency that has been de-stabilized by the U.S. administrations hostile trade policies. The currencies of Mexico, China, the euro-zone and most recently, Turkey have all felt the pain of hostile U.S. actions. Turkey is the most recent victim. The Turkish lira lost 33.4% of its value in just 48 hours after President Trump announced new tariffs. He was unhappy with the progress of diplomatic negotiations to free a U.S. pastor arrested in Turkey.
China’s currency has dropped nearly 11% since the U.S. increased the hostile trade rhetoric in April and talked of levying tariffs. China, unlike Turkey, is in a much better position to weather the Trump storm.
The Canadian dollar is in a tug of war between bullish and bearish traders. Canadians dollar bulls have an optimistic outlook about the NAFTA re-negotiations. They see the Trump threats of a bilateral Mexico/U.S. agreement and his use of tariffs as merely a negotiating tactic. They expect a favorable resolution and therefore believe Canadian dollar losses are limited. They are also focused on the domestic economic performance and believe the Bank of Canada will hike interest rates again in September or October.
The Canadian dollar bears see things differently. They think that Canada will be in a weaker position on a re-negotiated NAFTA deal. They believe that the pace of domestic rate increases will lack those from the Federal Reserve. They are also concerned that the China/U.S. trade war will lead to a drop in global economic growth and weaker commodity prices.
The Canadian dollar is now trading in the middle of its overnight range. There is a slew of U.S. economic reports on tap today, led by retail sales. Better than expected data will lead to a U.S. dollar rally and undermine the Canadian dollar.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
