The Canadian dollar consolidated yesterday’s losses in an uneventful overnight trading session. The Canadian dollar gapped lower at Monday’s open in Asia after U.S. President Trump ‘s Twitter tirade, He was unhappy with his perception of Prime Minister Trudeau’s comments about their trade talks. His flurry of tweets contained an earlier threat to levy 25% duties on cars imported from Canada.
The Canadian dollar came under pressure, and USD/CAD topped out at $1.3025 yesterday. Since then prices have see-sawed inside a $1.2975-1.3014 range, with an underlying bullish bias.
FX traders in Asia focused on the President Trump/Kim Jong-un summit in Singapore. The U.S. dollar was in demand during the Asia morning, but the Canadian dollar was largely ignored. Trump and Kim signed a declaration, and by most accounts, the meeting ended with a positive tone.
The focus shifted to upcoming data, particularly economic reports from the U.K., euro-zone and the U.S. The U.K. employment report was mixed. The Eurozone ZEW survey was soft, and the U.S. inflation report is waiting in the wings.
Canadian dollar traders will be keenly interested in the U.S. Consumer Price Index data. If inflation rises higher than forecast, it would suggest that the Federal Open Market Committee could issue a slightly hawkish statement. The subsequent U.S. dollar rally would undermine the Canadian dollar. If USD/CAD breaks above resistance in the $1.3035-65 area, it will lead to additional gains to $1.3125.
Canadian dollar direction is at the whim of U.S. dollar sentiment and global developments. There aren’t any top-tier domestic economic reports available this week. The focus is on the FOMC meeting on Wednesday and the European Central Bank meeting on Thursday. Both central bank decisions could send the Canadian dollar on a wild ride.
The Bank of Canada alluded to tightening rates in the "near future" in the May 30 interest rate policy statement. President Trump’s post G-7 tirade and trade threats may have thrown a wrench into those plans. Bank of Canada Governor Stephen Poloz declined to raise interest rates earlier this year due to a lack of clarity in the economic outlook because of trade uncertainty. Arguably the uncertainty got worse.
The FOMC doesn’t appear to have any concerns with their economic outlook. They will be raising interest rates on Wednesday. The risk is if the recent spate of better than expected US economic data results in a forecast for higher and a faster pace of rate increases.
The prospect of higher U.S. interest rates and steady to unchanged Canadian rates in an environment of increasing trade hostility will keep downward pressure on the Canadian dollar.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
