Global risk sentiment took a turn for the better overnight, and the Canadian dollar was a beneficiary. Global financial markets found the silver lining that was in the cloud of U.S./China trade tariffs. It was the news that the latest round of levies were only at 10%, not the 25% that was initially suggested.
China’s understated and measured reaction also emboldened traders. They retaliated with 10% tariffs on $60 billion of American imports. Later on, China Premier Li Keqiang said that China would not actively weaken the yuan saying "Persistent depreciation of the yuan will only do more harm than good to our country. China will never go down the path of stimulating exports by de-valuating its currency,"
Asian equity markets rallied as did the Australian, New Zealand, and Canadian dollars. These currencies got an added lift from a rise in commodity prices. The upbeat market sentiment continued in Europe. The major stock market indices posted gains while EUR/USD and GBP/USD traded higher.
Markets seem to have dismissed U.S. President Trump’s threat of tariffs on an additional $267 billion on China imports if Beijing retaliated, which they did. They shouldn’t. Trump continues to complain about China’s trade practices. Yesterday he tweeted "China has openly stated that they are actively trying to impact and change our election by attacking our farmers, ranchers and industrial workers because of their loyalty to me. What China does not understand is that these people are great patriots and fully understand that.... .China has been taking advantage of the United States on Trade for many years. They also know that I am the one that knows how to stop it. There will be great and fast economic retaliation against China if our farmers, ranchers and/or industrial workers are targeted!"
The overnight gains in the Canadian dollar due to broad U.S. dollar selling against the major G-10 currency pairs ignores Canada’s trade woes with the United States. The U.S. has imposed tariffs on imports of Canadian steel, aluminum, softwood lumber and are threatening to add 25% tariffs on Canadian cars if a US/Canada trade deal is not successfully negotiated. Arguably, a trade deal is far more critical to the health of the domestic economy than a Canada/US deal is for the Americans.
These trade talks are not going well. Yesterday, Trump said as much. He told reporters at the White House "Canada has taken advantage of the US for a long time," adding Canada is "not in a good position". Other Republicans echoed Trump’s comments. House Majority Whip Steve Scalise said there was growing frustration over Canada’s negotiating strategy.
The Canadian dollar is vulnerable to U.S. dollar gains from better than expected housing and building permits data and negative U.S.-Canada trade headlines.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
