The Canadian dollar rode a geopolitical tension powered rollercoaster for the past week. The ride is not over. Yesterday, traders feared rising geopolitical risk. Turkey retaliated against the Trump Administration by imposing tariffs on U.S. imports, and the U.S. was putting new sanctions on Russian and Chinese firms for dealing with North Korea. Traders were already very nervous over the lack of news/progress with the China/U.S. trade talks. FX traders succumbed to risk aversion fears and bought U.S. dollars. The Canadian dollar was collateral damage, again. USD/CAD climbed from $1.3051 to $1.3171 as the greenback recorded a 14-month peak against the euro.
There are a lot of factors driving U.S. dollar gains. The Federal Reserve is in tightening mode with expectations for two more rate hikes this year. That policy contrasts with benign policies in Japan, Australia, New Zealand, and the euro-zone. The United Kingdom raised rates recently due to rising inflation and healthy economic growth, but rising fears of a "no-deal" Brexit have overwhelmed monetary policy. The U.S./China trade spat risks becoming a full-blown war if America implements the additional $200 billion of tariffs at the end of the month. Traders are worried that a protracted trade war with the U.S. would exacerbate an already slowing Chinese economy, which would have a negative effect on global growth.
Russia is another sore point. U.S./Russia relations have deteriorated since the Putin/Trump summit. Iran/U.S. relations have deteriorated ever since President Trump pulled America out of the Iran Nuclear deal. He is threatening sanctions against countries and companies that trade with Iran. However, the U.S. was just one of a multi-nation signatory to the treaty. The E.U. maintains that the Americans do not have the authority to invalidate the treaty.
The Bank of Canada is also in tightening mode. However, the prospect of future Canadian rate hikes is overshadowed by fears that the North American Free Trade Agreement negotiations may collapse or result in an unfavorable deal for Canada. The U.S. has levied tariffs on Canadian imports of steel. Aluminum, and softwood lumber with the threat of 25% tariffs on cars still lingering in the air.
Another reason for the recent volatility in FX markets is the time of the year. August is a big holiday time in Europe, the U.K. and North America. FX liquidity diminishes leading to exaggerated price swings on headlines or data. There haven’t been a lot of top-tier U.S. economic reports lately, and Fed officials have been quiet.
Today’s U.S. economic reports are all second-tier, suggesting that any FX impact from the data will be short-lived. Today’s reports include Housing Starts, Building Permits, Jobless claims and Philadelphia Fed Manufacturing Index.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
