The Canadian dollar got rocked in overnight markets. It was not alone. The U.S. government announced it was levying new tariffs on $200 billion worth of Chinese imports. They were annoyed that China retaliated when the Americans imposed the last round of tariffs. It is not over. China described the tariffs as "totally unacceptable" and promised to protect their "core interests."
The announcement came at a bad time for Canadian dollar bulls They have been buying Canadian dollars since late last week in anticipation of a "hawkish" sounding Bank of Canada (BoC) statement which will be released at 10:00 a.m. EDT.
USD/CAD declined from $1.3385 on June 27 to $1.3065 on Monday. Traders are nearly unanimous in their belief that the BoC will raise the Bank rate from 1.5% to 1.75%. The argument stems from the style of hike it will take-a dovish hike or a hawkish hike.
Those expecting a dovish hike are very concerned about rising global trade tensions and the real risk that the North America Free Trade Agreement (NAFTA) could collapse.
The traders expected a "hawkish" hike point to BoC Governor Stephen Poloz’s comment last week where he said policy is "data dependent, not headline dependent." The data overwhelming support a rate increase. Domestic Gross Domestic Product is growing above trend and inflation is close to 2%. The economy has "little slack", and inflation is likely to be modestly higher throughout the year.
Traders are also expecting the quarterly Monetary Policy report to reflect modest upticks in growth and inflation forecasts.
If the BoC issues a "dovish" rate hike, the Canadian dollar will sink and revisit the end of June low. In contrast, a "hawkish" hike will boost the currency compared to the U.S. dollar.
Rising oil prices have failed to give the Canadian dollar much, if any, support for the past few months. Concerns about rising global demand and shrinking production have fueled the gains. President Trump renewed sanctions against Iran and threatened punitive tariffs on countries that import Iranian oil. Traders are concerned that the Organization of the Petroleum Exporting Countries’ recent production increase is not large enough to offset the loss of the Iranian crude. Production disruptions in Libya, Venezuela and Canada, plus an oil workers’ strike in Norway have elevated oil prices.
If the BoC says anything about domestic crude production supporting growth or exports, Canadian dollar and oil price movements may re-correlate, although that is a long-shot.
FX markets have shifted into "risk aversion" mode following the news of the latest U.S. tariff salvo. The move may be short-lived as it is a reaction to a "headline" rather than a firm policy. The China tariffs do not take effect until the end of August. That is plenty of time for tensions to abate. The news also occurred during a void in the availability of top-tier U.S. economic data.
The Bank of Canada will provide Canadian dollar direction today, not headlines.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
