The Canadian dollar came under selling pressure in Asia, overnight. It was caught up in a bout of poor risk sentiment in Asia markets which led to declines in the major equity indices, which were under pressure following Tuesday’s weak U.S. market close.
FX traders are cautious due to ongoing trade tensions. They were highlighted when China Service Purchasing Managers Index data was below forecasts. Some traders saw the report as evidence that the U.S./China trade spat was taking a toll on the economy. The U.S. is poised to levy $200 billion in tariffs on Chinese imports as early as Friday.
Canadian dollar traders are focused on trade issues closer to home. Another round of negotiations toward a new North American Free Trade Agreement begins in Washington today. U.S. President Trump was clear about his negotiating tactics. He said that he has no plans to offer any concessions to Canada and that there was no political necessity to include Canada in a new NAFTA.
Prime Minister Trudeau reiterated his government’s position. He said Canada would walk away from a deal if there wasn’t a third-party dispute resolution mechanism and if Canada’s cultural interests were not excluded. He didn’t say anything about protecting the dairy-supply management system. If that is a sign that Canada is willing to deal, then there may be hope for a new agreement. However, the talks could drag on for a while.
The Bank of Canada announces its monetary policy decision this morning. The odds of a rate increase at today’s meeting are "slim to none" leaving the overnight rate at 1.5%. The policy statement is not expected to offer up any surprises, either. Governor Stephen Poloz has said repeatedly that monetary policy is data dependent. Inflation is hovering around the Bank’s 2.0% target, employment is strong, and Q2 Gross Domestic Product growth is slightly above their 2.8% forecast.
Normally, the data would argue for an interest rate hike but these aren’t normal times. Governor Poloz said that the BoC would not react to headlines but even he cannot ignore Trump’s threat to proceed without Canada.
Canadian dollar weakness is not only due to domestic issues and NAFTA. The currency is caught up in a wave of broad U.S. dollar demand arising from the U.S. economy’s outperformance compared to the rest of the G-10. U.S. economic data is robust, suggesting the Americans' hostile and aggressive trade approach is not impacting their economy. The risk of a global economic slowdown and Trump orchestrated geopolitical tensions have fueled U.S. dollar demand and undermined emerging market currencies.
The Canadian dollar is also suffering from a negative technical setup. The USD/CAD rally above $1.3120 snapped a downtrend line from June which shifts the focus back to the 2018 peak of $1.3385.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
