The Canadian dollar dropped like a stone after Q2 Gross Domestic Product didn’t live up to expectations and President Trump’s deadline for a U.S./Canada trade deal came and went. It appears to have found a floor in the Canada 75.75-cent area. Traders are waiting for fresh news on the trade talks which resumed in Washington on Wednesday. Foreign Minister Chrystia Freeland sounded optimistic when she said the latest discussions were "constructive."
They could go south at any time. Prime Minister Trudeau insulted Trump yesterday when he justified Canada’s demand for Chapter 19, the third-party dispute resolution mechanism. Trudeau said "We need to keep the Chapter 19 dispute resolution because that ensures that the rules are actually followed, and we know we have a president who doesn't always follow the rules as they're laid out."
Trump isn’t known for ignoring insults and Trudeau’s remarks could get his dander up, to the detriment of the trade talks and Canada’s economy.
There weren’t any surprises from the Bank of Canada monetary policy meeting yesterday. The overnight rate was left unchanged at 1.5% which was almost universally expected. The policy statement painted an economic landscape that was robust. The BoC noted that the economy was growing as forecast, core inflation was at 2.0%, the housing market stabilized, and employment growth was lifting wages.
The bank had concerns, saying the risk to the economy came from rising global trade tensions and from the North American Free Trade Agreement talks. They believe that the ongoing NAFTA discussions have led to reduced investment. Nevertheless, they appear committed to gradual rate increases. Canadian rates will rise to 1.75% on October 24 assuming a successful conclusion to NAFTA.
FX traders are on full-alert for White House updates on the threatened $200 billion of tariffs on Chinese imports. Trump promised a 25% levy more than a month ago, but US law required a period for "public comments". That period ends today. The tariffs do not sit well with China which has vowed to retaliate. That country has already identified $60 billion of U.S. imports. It may also devalue its currency. USD/CNY was fixed at 6.8217 today. Analysts believe that the People's Bank of China (PBoC) does not want the currency pair above 7.00 during the trade talks. That could change if Trump, who recently said that he wasn’t ready to talk trade with China, authorizes the tariffs.
Canadian dollar traders are also biding their time until Friday’s domestic employment report details are released. Canada is expected to have added 5,000 new jobs while the unemployment rate increases to 5.9% from 5.8%. U.S. non-farm payrolls data is also due. The forecast is for a gain of 197,000 jobs with some analysts suggesting the risk is for stronger than expected data. The unemployment rate is forecast to drop to 3.8% from 3.9%
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
