U.S. President Trump unleashed a nasty tirade against Prime Minister Trudeau and Canada’s trade negotiators yesterday. The Canadian dollar was collateral damage. Trump stomped all over that view. At a press conference, he said he rejected a meeting request by Trudeau "because his tariffs are too high and he doesn’t seem to want to move, and I told him forget about it."
Then he got going. He complained about the negotiations and the negotiating style of Canada, adding "we don’t like their representative very much." He went on to rail against the "300% tariffs" on dairy and once again, threatened to slap 25% tariffs on Canadian car imports.
Trudeau did not deviate from his statement that a "bad NAFTA deal was worse than no-NAFTA," in reference to the North American Free Trade Agreement. A very skeptical Trudeau said Trump told him not to worry about the tariffs if there was a deal.
Traders had been buying the domestic currency on the assumption that a trade deal would be worked out by the U.S. September 30 deadline. USD/CAD traded as low at $1.2945 yesterday but soared to $1.3058 by this morning’s Toronto open.
There is no shortage of dire predictions about the impact on the Canadian dollar if the trade talks collapse. A major U.S. bank predicts the loonie would sink to 70 cents (about 10%) against the U.S. dollar.
Trump’s comments weren’t the only reason for the weaker Canadian dollar. The Federal Open Market Committee (FOMC) had a hand in it. The FOMC behaved as expected, raising the Fed funds rate to 2.00-2.25% and modestly upgraded Gross Domestic Product forecasts for 2018 and 2019. The action that got the most attention was the removal of "The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2% inflation" from the statement.
Fed Chair Jerome Powell spent a lot of time explaining and trying to convince markets that the removal of "accommodative" was not a shift in policy. It was merely a much-needed edit to a phrase that had outlived its useful life.
The FX market took some time but gradually started to buy U.S. dollars against all the G-10 major currencies, which undermined the Canadian dollar in the process. U.S. dollar demand accelerated in Europe, this morning, helped by weaker than expected euro-zone economic data and concerns about the Italian budget deliberations.
There are a lot of US economic reports due today including Q2 GDP and Durable Goods Orders. The data is expected to be strong, which will support U.S. dollar gains. Canadian dollar traders are looking ahead to Friday’s July GDP report.
Bank of Canada Governor Stephen Poloz will be giving a speech near the end of the day
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
