U.S. Federal Reserve Chairman Jerome Powell testified before Congress on Tuesday. His testimony helped to sink the Canadian dollar. Economists and analysts didn’t expect the Chairman to deviate very far from his comments at the Federal Open Market Committee press conference. He didn’t. However, FX traders reacted like his remarks were new insight and bought US dollars. The Canadian dollar was collateral damage.
Powell said that inflation would stay near 2%, and the employment market would continue to be robust. Such being the case, he stated that the Fed would continue to gradually raise interest rates. Yesterday’s U.S. economic data, which included NAHB Housing Market Index, Capacity Utilization and Industrial Production supported his view for continued strong economic growth.
Powell’s comments and the economic data came on the heels of dire warnings from Bank of England Governor Mark Carney. The governor warned of "big economic consequences" if the U.K. government fails to execute a Brexit agreement. The statement wasn’t news, but it came at a time when Prime Minister Theresa May’s government was under duress from senior party member resignations and the risk of a non-confidence vote. The risk of a U.K. government collapse as the Brexit deadline approaches raised the risk of a "hard" or no-Brexit result. The subsequent GBP/USD collapse led to broad US dollar demand against the G-10 major currencies.
Canadian dollar traders have short memories. It was just a week ago when the Bank of Canada raised the overnight rate by 0.25% to 1.5%. The following policy statement was fairly hawkish, and it only gave a passing nod to elevated trade risks. Bank of Canada Governor Stephen Poloz stressed that the Governing Council could only react to data and not to headlines. His outlook was optimistic and left the door wide open to another rate increase in September.
Normally, the Canadian dollar would rally in that environment. These aren’t normal times. U.S. President Trump is upsetting the global trade order. He is imposing tariffs and disregarding World Trade Organization rulings. His threat to impose tariffs on cars imported into the US is a key reason why the Canadian dollar has sunk.
North American Free Trade Agreement talks have stalled, and there are a lot of unresolved issues. The U.S. wants Canada to scrap its supply management boards for dairy. Canada is against it. Wisconsin produces more milk than every dairy farm in Canada, combined. Steel, aluminum, softwood lumber and the sunset clause are other sticking points in the negotiations.
The Canadian dollar is not alone. The Australian and New Zealand dollars have suffered just as much because President Trump initiated the China/U.S. trade skirmish and the outlook for higher U.S. interest rates.
Today’s U.S. data reports, which include housing starts and building permits as well as day two of Powell’s Congressional testimony will keep the Canadian dollar on the defensive.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
