Today is Friday the 13th. It is considered an unlucky day for superstitious people. They avoid black cats, walking under ladders and in the U.S.A., summer camps. It may be an unlucky day for the Canadian dollar as well.
The Canadian dollar has not seen any benefit from Wednesday’s Bank of Canada (BoC) rate hike. It has not gotten any benefit from the optimistic economic outlook espoused in the Monetary Policy Report, and it has not benefited from the surge in oil prices over the past few months.
The BoC suggested the lack of Canadian dollar from rising oil prices was due to broad US dollar strength and rising trade tensions, but otherwise, had a very positive outlook for the domestic economy. They said it was operating close to full capacity with gross domestic product growth expanding faster than previously forecast. They are projecting 2018 Q2 GDP growth at 2.8% fueled by solid foreign demand and accommodative financial conditions. They said that economic growth is shifting from consumer spending to business investment.
Usually, an upbeat BoC economic outlook accompanied by an interest rate increase would translate into a sharply stronger Canadian dollar. That wasn’t the case this week.
The BoC admitted the outlook was risky because of the ongoing shift to protectionist global trade policies. Governor Stephen Poloz said that monetary policy is data dependent not headline dependent and that was reflected in the July 11 MPR. Their financial models took into account the actual tariffs on steel, aluminum and softwood lumber exports as well as the tariffs that Canada imposed on U.S. imports. They did not adjust their forecasts for the possible disruption caused if the U.S. imposed tariffs on car imports.
However, FX traders adjusted their forecasts. The BoC rate hike and MPR is "old news" to traders. They are focused on future developments and cannot discount the risk of an expanding trade war, which has limited Canadian dollar upside.
Canadian dollar gains are also limited by global US dollar sentiment, and that sentiment is positive. US economic growth is outperforming that of the other G-10 majors. Global financial conditions are accommodative while the U.S. is tightening. The European Central Bank (ECB) said that its rates weren’t going anywhere until the latter half of 2019. U.S. interest rates may have increased an additional 1.5% by that date.
The Canadian dollar negatives are plentiful which suggest the currency is likely to trade a lot lower in the next few months. However, that may not be the case. Canada, like the U.S., is tightening monetary policy. Central banks in Japan, Australia, New Zealand and the ECB are not just leaving rates unchanged. They have no intention of increasing them for at least a year. Rising interest rates and robust economic growth should help to limit Canadian dollar losses, leaving the currency rangebound for the coming month.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
