The Canadian dollar is vulnerable as the U.S./China trade war has begun in earnest. President Trump fired the next salvo to kick off the hostilities by imposing 10% tariffs on up to $200 billion worth of Chinese imports effective September 24. Those tariffs rise to 25% on January 1, 2019.
He exempted some technology products like Apple watches, Fitbits an iPhones, which implies he may want the new iPhone XS.
China said they would take "synchronised countermeasures" which will irritate the president. He promised to put duties on another $267 billion of China imports if China retaliated. If so, it means the U.S. has placed tariffs on all of China’s U.S. exports.
China is annoyed at America’s approach to negotiating a new trade deal and is coming to this war with weapons of its own. China has been keeping USD/CNY below 7.00. That could easily change. Devaluing its currency is one way of counteracting the U.S. measures. China could wreak havoc on the U.S. bonds if they decide to unload some of the $1.17 trillion in U.S. Treasurys that they own. China is reportedly looking into disrupting the U.S. supply chain by making it difficult for Americans to get technology and manufacturing parts. Sure, China’s economy would be damaged under such a scenario, but President XI Jinping’s term is far longer than President Trumps. And President Jinping doesn’t have to deal with an unwieldy and uncooperative political opposition.
Canadian dollar traders should be watching the U.S./China trade developments with trepidation. Foreign Minister Chrystia Freeland is returning to Washington later this week for more trade talks. President Trump has not shown any evidence that he is willing to compromise on what he sees as unfair trade practices. Canada’s apparent insistence on maintaining its current dairy supply management program could be a deal-breaker for Trump. He has already said that if these talks fail, he will levy 25% sanctions on Canadian car imports.
Another stumbling block to successful Canada/U.S. trade talks is the personality clash between U.S. Trade Representative Robert Lighthizer and Chrystia Freeland. She has annoyed the Trump administration by her apparent support for anti-Trump causes.
Canada is also disadvantaged in the trade talks by the trade disparity. The U.S. accounts for about 75% of Canadian exports, while U.S. exports to Canada are a mere 20%. The Americans are better situated to withstand the disruptions from a trade war with Canada.
Canadian dollar traders are well aware of the dangers of the U.S./Canada trade talks collapsing which is why USD/CAD struggles to gain traction below $1.3000, despite expectations for another Bank of Canada rate hike next month.
Canada Manufacturing Shipments data for July are expected to be 0.6%, down from 1.1% in June.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
