The Canadian dollar continues to bask in the glow of the new U.S. Mexico Canada Agreement, the trade pact that replaced the North American Free Trade Agreement (NAFTA). Rumours, expectations and then confirmation that the U.S. and Canada had come to terms on a new trade pact drove USD/CAD from $1.3080 on September 27 to $1.2784 on October 1.
The Canadian dollar has been consolidating the gains since then. The new trade deal improved the Bank of Canada’s clarity for its domestic economic outlook. They had raised interest rates twice in 2018 because of strong economic growth, low unemployment and rising inflation.
They are expected to increase rates again on October 25, but that hike may have been delayed if a trade agreement wasn’t in place, especially considering U.S. President Trump’s threat to levy tariffs on Canadian car imports.
The impact of the trade deal is already fading. Financial markets are shifting their attention to domestic and global macroeconomic developments, and geopolitical issues. The Italian budget debate has a contagion effect on the G-10 major currencies due to its impact on the Euro. Fears that the Italian policymakers decision to shun European Union spending guidelines could lead to other euro-zone members adopting the same tactic put downward pressure on the Euro. The ensuing shift into "risk aversion" trades served to undermine the Canadian dollar in the process.
The euro-zone developments are a potential negative for the Canadian dollar, however, the domestic economic outlook offsets those risks. Canada’s economy is robust but not at the pace of the American economy which for all intents and purposes, is on fire. A booming American economy is good for the Canadian dollar due to the volume of trade between the two nations. That means it’s good for the Canadian dollar as well.
The Canadian dollar is benefiting from the surge in oil prices. West Texas Intermediate, the North American benchmark crude price has surged as the deadline for U.S. sanctions on Iran approaches. WTI extend gains again overnight, rising to $76.44 U.S. from $76.01. That move is even more impressive in the face of yesterday’s report by the U.S. Energy Information Administration that weekly crude inventories increased by 7.975 million barrels last week.
Russia and Saudi Arabia have reportedly agreed to increase crude production to help offset the loss of Iranian output due to Trump’s sanctions. The American president may deserve some credit for the decision. He has stepped up the pressure on Saudi Arabia by reminding that country of how it benefits from American military support. The Canadian dollar and WTI price moves are correlated again.
The Canadian dollar may get additional support from the Ivey Purchasing Managers Index data today, if the result is better than the expected 62.3.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
