The Canadian dollar is feeling some bad vibes. The simmering China/U.S. trade dispute boiled over into a full-scale trade war yesterday. China responded to President Trump’s threat of an additional 10% tariff on another $300 billion of Chinese imports into the U.S. Beijing announced that they would suspend all purchases of American agricultural products. They said it was "a serious violation of the consensus of the heads of state of the two countries." Then it upped the ante. The People's Bank of China (PBoC) allowed its highly managed currency, USD/CNY, to break above the psychologically important 7.00 level, which hadn’t happened in 11 years.
China’s overt defiance angered President Trump. In a series of angry tweets, he said "China dropped the price of their currency to an almost a historic low. It’s called 'currency manipulation.' Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time! Based on the historic currency manipulation by China, it is now even more obvious to everyone that Americans are not paying for the Tariffs – they are being paid for compliments of China, and the U.S. is taking in tens of Billions of Dollars! China has always.... ....used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices. Not anymore! China is intent on continuing to receive the hundreds of Billions of Dollars they have been taking from the U.S. with unfair trade practices and currency manipulation. So one-sided, it should have been stopped many years ago!”
Treasury Secretary Steven Mnuchin reacted quickly to Trump’s tweet. The Treasury Department issued a press release titled "Treasury Designates China as a Currency Manipulator."
Financial markets reacted predictably. Wall Street stocks tumbled, and safe-haven currencies soared. USD/JPY plunged to 105.58 from 106.20 and USD/CHF fell from 0.9839 to 0.9704. U.S. Treasury yields plummeted as well. The Canadian dollar avoided the brunt of the risk aversion sentiment.
A sense of calm returned to markets overnight, and risk aversion sentiment gave way to modest risk-seeking demand. USD/JPY rebounded, rising from a low of 105.58 to 107.08 coinciding with a jump in 10-year U.S. Treasury yields from 1.68% to 1.74%.
AUD/USD was hammered before prices bounced on the back of the rebound in risk sentiment. The Reserve Bank of Australia left the overnight rate unchanged, preferring to wait and see how its June and July rate cuts impact the economy. The statement set the table for additional easing. It said, "The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year, and further monetary easing is widely expected."
EUR/USD got a lift from safe-haven demand, however, mixed to soft Eurozone and German data combined with expectations for European Central Bank easing in September, capped gains. Prices have since retreated to $1.1187 in Toronto trading today.
The Canadian dollar is consolidating losses after USD/CAD broke above resistance at $1.3190. Risk aversion sentiment rising from the China/U.S. trade war is being offset by recent better than expected domestic economic data.
The U.S. and Canadian economic calendars are light today. Wall Street moves, and trade headlines will dictate FX price action.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
