The Canadian dollar is under duress. It hasn’t recovered from the one-two punch it received on Friday when the Canadian employment report was weaker than expected while U.S. employment data surprised to the upside.
Statistics Canada reported Canada lost 51,600 jobs in August with a corresponding rise in the unemployment rate from 5.8% to 6.0%. The reaction to the Canadian data is in the words of William Shakespeare: "much ado about nothing." The Canadian report is notoriously volatile and erratic. Scotiabank economists point out that the report has a 95% confidence interval of plus or minus 54,400. Enough said.
The U.S. data is a tad more believable. Non-farm payrolls rose 201,000, beating the 191,000 forecast. More importantly, average hourly earnings jumped to 2.9% from 2.7%. The data reconfirmed what the market already knew the U.S. economy is booming. The increase in earnings suggested that inflation may start to rise more rapidly leading to a faster pace of rate hikes by the U.S. Federal Reserve.
The Canadian dollar finished the day on a weak note, drifting lower in overnight markets and is on the defensive in early New York trading this morning. The U.S./Canada trade talks are weighing on the currency, and if weekend developments are an indication, the Canadian dollar could be in for a rough ride.
On Friday, it was reported that President Trump threatened "the ruination" of Canada if the two countries did not strike a deal on the North American Free Trade Agreement. The two countries are reportedly at loggerheads over Chapter 19 dispute resolution and supply management.
The U.S. wants to do away with both of those items. Prime Minister Trudeau has a lot at stake. He has vowed to protect Canada’s supply management system but can’t afford to alienate the entire country if he allows the U.S. to decimate the Canadian economy through tariffs on cars.
White House Economic Council Director Larry Kudlow put it bluntly on Saturday. He said "I think the United States would rather have a trade deal with Canada, but it has to be a good deal, right? And the word that continues to block the deal is m-i-l-k, OK?. I'm just saying, 'Let go. Milk, dairy, drop the barriers, give our farmers a break, and we can fix some other things.' So I want to predict. I'll just say Bob Lighthizer is doing a great job and the president is encouraging it.''
His words were echoed by U.S. Agriculture Secretary Sonny Perdue and Senator Tom Reed of the House Ways and Means committee.
The risk that Canada fails to secure a deal with the U.S. is undermining the Canadian dollar. It is not just the Canadian talks either. President Trump appears ready to levy fresh tariffs on China. The risk of a global economic growth slowdown from such a move is also weighing on the currency.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians