The Canadian dollar is consolidating last week’s gains in a narrow trading range after an uneventful overnight session. FX trading in the major G-10 currency pairs was subdued to start the week. Hurricane Florence and Typhoon Mangkhut provided enough distraction to keep players on the sidelines. The Respect-for-the-Aged-Day holiday in Japan drained a lot of liquidity from the market which served to dampen trading enthusiasm.
The Canadian dollar is in demand because of the relativity strong economic data that has been released in the past few weeks. That has helped to stoke interest rate hike sentiment. The next Bank of Canada policy meeting isn’t until October 24. BoC Governor Stephen Poloz repeatedly says that the Bank is data dependent, not headline dependent. His remarks and the economic data have underpinned the currency.
The U.S./Canada trade negotiations are the "albatross around the neck" of the loonie. Prime Minister Justin Trudeau reiterated last week, that "Canada won’t sign a bad NAFTA deal," in reference to the North American Free Trade Agreement. To the Prime Minister and his Quebec supporters, a bad NAFTA deal is any deal which gives the Americans access to the Canadian dairy industry. Auto workers in Ontario are concerned.
President Trump has threatened to impose 25% tariffs on cars imported from Canada if there isn’t a trade deal. The auto workers want to know why Trudeau is protecting the few thousand dairy farmers, (who have an average net worth of $4.0 million) while risking the livelihood of 140,000 auto workers. Canadian dollar gains will be limited as long as the trade talks are active.
Canadian dollar traders may get minimal direction from domestic data on Tuesday, but the critical information isn’t available until the end of the week. That’s when retail sales and inflation reports are released. Tuesday, Manufacturing Shipments are expected to dip to 0.7%, m/m in July, down from the 1.1% recorded for June. Better than expected data will only offer limited support to the currency because of the trade talks.
Friday’s inflation report is the most important data release. Traders will be looking to see if the BoC was correct in their conclusion that the 3.0% headline CPI was a bit of an anomaly and due to "transitory factors." If the result surpasses the 3.0%, y/y seen in July, USD/CAD will rally on speculation of a faster pace of BoC rate hikes.
Retail Sales are expected to rebound from July’s disappointing 0.2% decline and rise 0.4%. The reaction to the data will depend upon the details of the report, especially if the gains are all due to a rise in gas prices.
Canadian dollar direction is also at the mercy of broad U.S. dollar moves against the G-10 major currencies. There isn’t any top-tier U.S. data this week, but President Trump is the wild card.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
