The Canadian dollar sentiment has turned mildly bullish from a technical perspective, but it cannot seem to get any traction when USD/CAD prices are below $1.3000. Yesterday, Canada June Retail Sales data showed a 0.2% drop which was slightly worse than expected. However, the ex-autos component was exactly as forecast. Statistics Canada said that the Q2 Retail Sales rose 1.0%, better than the 0.5% gain seen in Q1.
The Retail Sales report was just the latest in a string of robust Canadian economic reports. May Gross Domestic Product rose 0.5%, m/m, higher than expected. Canada’s trade deficit narrowed, employment soared, and July Consumer Price Index rose 3.0%, y/y. The strong data suggests the Bank of Canada could raise interest rates as early as September 5. The odds are about 40% for such a move, but more than likely the next rate increase will be at the October 24 meeting.
Yesterday, the U.S. Federal Open Market Committee minutes from the August 1 meeting left little doubt that the Fed will be raising interest rates on September 26. The probability of such a move is 94% according to the CME FedWatch tool. The FOMC minutes were somewhat upbeat. They said labour market conditions had strengthened and measures of nominal wage growth picked up modestly. They dismissed the small rise in the unemployment rate because it was due to an increase in the participation rate.
They highlighted that inflation remained near 2% on a 12-month basis. Participants concluded that "if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation."
The FOMC noted that ongoing trade disagreements and proposed trade measures were important sources of uncertainty and risks. That sentence led some traders to view the minutes as dovish, and they sold U.S. dollars. The Canadian dollar rose as a consequence, but the bearish dollar sentiment disappeared in overnight markets.
The Canadian dollar trade lower in Asia and Europe on the back of broad U.S. dollar strength. The U.S. imposed tariffs on $16 billion worth of Chinese goods effective today, and China responded by levying tariffs on the same amount of US imports. The move served to remind FX traders that the U.S. plans to impose tariffs on another $200 billion worth of Chinese goods at the end of next week.
If they follow through, it will bring the U.S./China trade war to a new level. The risk of lower global growth would lead to U.S. dollar demand and undermine the Canadian dollar in the process.
However, there is hope that the U.S., Canada and Mexico will announce a "handshake" North American Free Trade Agreement as early as next week, which would boost the Canadian dollar.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
