The Canadian dollar consolidated yesterday’s gains in a choppy, yet thin overnight trading session. The Canadian dollar has rallied 1.3% since the beginning of the week after news headlines proclaimed Canada’s willingness to sign a new North American Free Trade deal. If inked, the Canadian dollar will rally a lot further.
A major sticking point between Canada and the U.S. has been Canada’s insistence that its dairy supply management system was not open for negotiations. The US said that if Canada keeps that stance, there is no hope for a deal and if there is no deal, 25% tariffs on cars will be imposed immediately.
The dairy issue is a sticky one for Prime Minister Trudeau. The bulk of the domestic dairy industry is in Quebec and Ontario. If the Liberals cave in to U.S. demands, they risk losing a lot of votes. With a Federal election a year away, it is not an enviable solution.
On the other hand, there are strong arguments for ending supply management, chief among them is that Canadian consumers would benefit from lower prices.
If a deal is reached, it clears the road for the Bank of Canada to focus on the domestic economy without having to worry about an economic downturn caused by the trade disruption.
The Bank of Canada will get more clarity on the economy this morning with the release of Q2 gross domestic product data. An upside surprise to the 3.0%, q/q forecast would put a September rate hike on the table. At the moment, the odds are less than 20% for such a move, suggesting there is plenty of room for the Canadian dollar to rally if the BoC raises rates on September 5.
It has been a fairly “slow-news” week in global FX markets. Summer holidays are winding down, liquidity is not at optimum levels and the upcoming long weekend in Canada/US suggests an early end to the trading week.
Before that happens, there is a lot of top-tier economic data being released in various regions. Japan inflation data is due tomorrow as is China Purchasing Managers' Index data. There is a slew of euro-zone economic reports including Consumer Price Index and Unemployment.
The U.S. data is mostly second tier but Friday is also month end. The outperformance of U.S. stock markets compared to those in other regions suggests portfolio managers will be aggressive sellers of US dollars
That bodes well for Canadian dollar bulls. The prospect of a robust Canadian GDP report today, month-end portfolio demand for Canadian dollars and a new NAFTA deal would send the Canadian dollar soaring. Time will tell.
The Canadian dollar will soar if Canada comes to terms with the U.S. trade negotiators. The Canadian negotiating team is in Washington trying to hammer out a deal. The U.S. government insists an agreement must be reached by Friday. That’s because Mexico needs the time between now and December 1 to ratify the U.S./Mexico pact, before the new Mexican president takes office. It is also crucial for the Trump administration, which needs 90 days before Congress can ratify the deal.
Those time constraints have put the Canadian negotiating delegation under extreme pressure. It needs to get an agreement completed as President Trump has threatened to impose 25% tariffs on car imports if it doesn’t happen. Car tariffs would decimate the Ontario economy and would severely hamper the Liberals re-election prospects.
The Globe and Mail published an article during the Asia trading session which implied that Canada would give in to US demands in order to secure a deal. They said the government would make concessions on dairy in hopes of preserving the dispute resolution process and protect Canada’s pharmaceutical industry. The issue is that the US knows they have Canada over a barrel and they may use that advantage to extract more concessions.
The Canadian dollar climbed in Asia, immediately after the Globe and Mail article was published. USD/CAD dropped from $1.2934 to $1.2905 but recovered the losses by the Toronto opening this morning.
The initial reaction to news that Canada and the U.S. have reached an agreement will boost the Canadian dollar to the 80.0-cent level (USD/CAD $1.2500) The move will be fueled by expectations that the Bank of Canada (BoC) would raise interest rates by 0.25% as soon as next week. The BoC’s monetary policy deliberations have been hampered the last few months by the ongoing uncertainty around the NAFTA talks. The U.S. government's imposition of tariffs on steel, aluminum and softwood lumber were another major concern. It is not clear if all these tariffs would disappear under the new agreement which would be a Canadian dollar negative.
Another barrier to Canadian dollar gains is U.S. dollar sentiment. The greenback has been under pressure for the past few weeks with Fed Chair Jerome Powell’s Jackson Hole speech exacerbating the U.S. dollar selloff. The Chairman said that the Fed would continue with a gradualist approach to monetary policy due to uncertainty global. However, the U.S. dollar index suggests that while prices are above 95.30, the U.S. dollar selloff is just a correction.
The Canadian dollar may get a bit of a lift from this morning's Current Account data. Analysts expect that Canada’s current account narrowed to -$15.2 billion in Q2.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
