USD/CAD - Canadian dollar clocked

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The Canadian dollar got clocked yesterday and remained under pressure in overnight markets. USD/CAD was probing support in the $1.2960 area yesterday in a move fueled by a modest improvement in FX risk sentiment. Global equity indices rallied, led by gains in China’s Shanghai Shenzhen CSI 300 index, and the U.S. dollar was broadly weaker. And then things took a turn for the worse.

The July Ivey Purchasing Managers Index was sharply lower, falling to 56.7 from 65.1. The data wasn’t all bad. Readings above 50.00 point to increased economic activity, however, in the face of heightened U.S. trade tensions and tariffs, it led to profit-taking. Stop losses were triggered when USD/CAD broke above the $1.3010 area and again at $1.3050.

The Canadian dollar slipped further in overnight action at is currently trading at USD/CAD $1.3090 in Toronto. Part of the move can be attributed to a shift into risk aversion trading sparked by a surge in China Exports in July. It suggests that U.S. tariffs haven’t had an impact yet and could anger President Trump.

The diplomatic row between Canada and Saudi Arabia was another cause for concern for Canadian dollar traders. Saudi Arabia cancelled all Canadian wheat purchases which led to speculation about whether or not the Kingdom would cancel the $15-billion armoured car purchase.

Canada is also under the threat of a 25% tariff on autos imported into the U.S. If levied, the tariffs would decimate the Canadian auto industry and negatively impact domestic growth. President Trump has not excluded Canada from the duties.

The state of the North American Free Trade Agreement re-negotiations is another concern for Canadian dollar traders. At this juncture, it doesn’t look good for Canada. There are reports that the chief Canadian and U.S. trade negotiators do not get along. President Trump is on record for preferring a bilateral deal, and the U.S. appears to be well along the road to achieving that aim with Mexico.

Just over a week ago, U.S. Trade Representative Robert Lighthizer told a U.S. Senate subcommittee that a Mexico/U.S. deal would force Canada to make concessions.

The Canadian dollar is not getting much benefit from oil prices in the $70.00/barrel range. The price of Canadian crude has a lot to do with it. Canada’s main crude export, Western Canada Select is trading at a $40.00/barrel discount to the North American benchmark, West Texas Intermediate.

Summer markets and a lack of top-tier actionable economic data may be playing a role in the recent Canadian dollar volatility. That is unlikely to change today. There aren’t any important domestic or U.S. data releases on tap, leaving FX moves at the mercy of headlines, rumours and equity market developments.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians