Trade war fears are exerting pressure on the Canadian dollar. Fears that the United States will walk away from the 24-year-old trade pact have been around for as long as Donald Trump has been President. They have become more pronounced in the past week. Trump mused about scrapping the trade pact and negotiating bilateral agreements between Mexico and Canada, last week.
His thoughts were repeated by White House Economic Advisor Larry Kudlow, on Tuesday. Rumours surfaced that Trump would use the G-7 meeting in Charlevoix, Quebec as his platform to announce America was pulling out of the trade deal.
The fears about the North American Free Trade Agreement led traders to ignore the Bank of Canada’s upbeat outlook for the domestic economy. The May 30 policy statement was positive, and Governor Stephen Poloz repeated his outlook yesterday during the press conference for the Financial Stability Report However he did say the most significant risk to domestic economic growth was trade uncertainties.
The Canadian dollar has traded erratically this week and has a negative bias. The U.S. Federal Open Market Committee (FOMC) is widely expected to announce a 0.25% hike in interest rates in the near future, from 1.50% to 1.75%. However, the tone of the statement and changes in the economic projections will be crucial. If they indicate that the pace of rate hikes will increase, the U.S. dollar will rally, undermining the Canadian dollar in the process. A dovish outlook would spark a U.S.-dollar selloff and shift the focus to the next European Central Bank meeting
The Canadian dollar is also under pressure due to a drop in oil prices. West Texas Intermediate (WTI), the North American benchmark price for crude oil, dropped $8.65 per barrel over the past two weeks. It is trading above the June 5 low, but the technical outlook is bearish. Oil traders are concerned about rising U.S. production and talk that the Organization of the Petroleum Exporting Countries may raise quotas due to productions problems in Iran, Venezuela, and Nigeria.
The Canadian employment report was released today. Confounding the economists, the economy lost 7,500 jobs in May, far from the 17,000-job improvement expected. If the data surprises to the upside, the Canadian dollar will rally. However, gains may be short-lived due to the risk that NAFTA collapses. A weaker-than-expected report would exacerbate NAFTA fears and sink the Canadian dollar.
There isn’t any notable U.S. economic data ahead, suggesting that FX trading activity will rapidly decrease into the weekend.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
