FX markets came to life yesterday following weaker than expected U.S. Institute for Supply Management Manufacturing Purchasing Managers Index data. A wave of selling pressure washed over the U.S. dollar which lost ground against all the G-10 majors, except against the Canadian dollar. The local currency opened in Toronto today, weaker than where it opened yesterday, and it has dropped even lower in early Toronto trading.
Canadian dollar traders are mildly concerned that a slowing U.S. economy (as evidenced by ISM Manufacturing PMI) will weigh on domestic economic growth, especially since the U.S. is still Canada’s largest trading partner. Traders are concerned about how the Bank of Canada will react to the latest U.S./China trade news, threats of US tariffs on French imports and the news of U.S. tariffs on steel and aluminum imports from Brazil and Argentina.
Last month, Canadians were treated to contradicting outlooks from senior Bank of Canada officials. Deputy Governor Carolyn Wilkins said that the uncertainty around the U.S./China trade war, Brexit, unrest in Hong Kong, and Middle East tensions had worsened. She hinted that the BoC could cut interest rates if things worsened, saying "policy interest rate may be relatively low now, but at 1.75 percent we still have room to manoeuvre. And, we have other options in our tool kit, such as extraordinary forward guidance and large-scale asset purchases."
The Canadian dollar weakened following her speech, but a days later, Governor Poloz seemed to contradict Ms Wilkins. He suggested that Canada’s monetary policy was in "the right spot" given economic conditions. Analysts immediately downgraded rate cut fears.
However, recent developments on the global trade front may have changed Poloz’s view. Late yesterday, the Americans threatened France with $2.4 billion worth of tariffs on a host of products including sparkling wine, cheese and handbags. They said it was because of the new French digital tax. The statement from the Office of the U.S. Trade Representative said the tax "discriminates against U.S. digital companies, such as Google, Apple, Facebook, and Amazon."
Traders were also concerned that the US/China trade war would drag on until the end of next year. President Trump suggested as much today when he said: "In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right."
The Reserve Bank of Australia left interest rates unchanged and issued a somewhat more hawkish than expected statement which implied the RBA was content with its "wait-and-see" stance.
There isn’t any U.S. or Canadian data of note today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
