The Canadian dollar was a somewhat reluctant participant in last week’s broad G-10 currency rally against the US dollar. It squeezed out a 0.95% gain between the August 17 New York close and the August 24 close. The Euro was the best performing currency gaining 2.1% in the same period. The Japanese yen was the exception as it shed 0.69% due to the modestly improved risk tone in markets.
The commodity currency bloc is shedding some of those gains in early New York trading. AUDUSD and NZDUSD retreated, in part due to a lack of progress in the US/China trade talks. Trade talks are undermining the Canadian dollar in early trading today. The US and Mexico are reportedly on the brink of announcing a trade deal, which may occur before the end of the day. Bloomberg reported that the weekend talks led to a breakthrough on the auto and energy files. They said “ the U.S. agreed to keep the 2.5 per cent tariff currently applied under World Trade Organization rules if the cars are made at factories that already exist, leaving open the possibility that cars that don’t meet the rules and are built at new plants could face tariffs of 20 per cent to 25 percent”
Canada wasn’t part of the discussions and therein lies the problem for the Canadian dollar. A US/Mexico deal gives the American’s the upper hand in talks with Canada. Canada could be forced to accept less favourable terms than currently exists or be excluded altogether. Neither option supports the Canadian dollar due to the negative impact a sharply weakened auto sector would have on the Canadian dollar.
The US dollar sell-off last week was put on hold in FX markets overnight. That’s because the world’s largest FX trading centre, London, England, was closed for a Bank holiday. London’s average daily FX turnover is $2.73 trillion, according to a Bank of England survey in April. That is a lot of liquidity to remove from the market which greatly curtails price action.
Fed Chair Jerome Powell’s highly anticipated speech from the Jackson Hole symposium was considered to be slightly dovish. He reiterated the Fed’s need to maintain a gradualist approach to rate increases because the FOMC needs to avoid both curtailing an expansion or overcooking economic growth. Those remarks helped the Canadian dollar climb on Friday, but most of those gains have been erased this morning.
The Nafta talks are a key driver for the Canadian dollar, and they may overshadow Thursday’s Canadian GDP report. A strong report will keep an October rate hike on the calendar.
