The Canadian dollar has gone on a wild ride this morning after strong gains yesterday. Said Rahim Madhavji, President of KnightsbridgeFX, a Canadian currency exchange company that helps Canadians get better exchange rates than the banks.
Those gains have evaporated due to President Trump’s policy on US steel and aluminum and weaker than expected GDP in Canada.
US policy by President Donald Trump indicated that it is going forward with tariffs on aluminum and steel imports from Canada and Mexico. This could be the start of a disastrous trade war, which would significantly hurt Canada.
Retaliation would be expected from both Canada and Mexico and the situation has become complex pretty quickly.
The thought of a rate hike in July might be off the table if this trade war continues or gets worse. The loonie could be in big trouble.
Yesterday, the Bank of Canada was almost universally expected to leave Canadian interest rates unchanged at their May 30 policy meeting, and they did. They were expected to issue a positive but cautious statement. Analysts believed that the risk that the US imposes new tariffs on steel and aluminum imports from Canada (and elsewhere) on June 1, combined with President Trump’s threat of a 25% tariff on car imports would be reason enough for a cautious approach. In addition, there were threats to global growth from the on-going US/China trade spat and elevated tensions between Iran and the US.
Apparently, none of that mattered. In the Bank of Canada statement, they dropped the word ‘cautious” from the reference to future policy adjustments, implying a faster pace of rate increases.
The Canadian dollar soared. USDCAD plunged from 1.3015 to 1.2834 by the close of business in Toronto on May 30. Overnight, traders extended those losses and USDCAD found a bottom at 1.2817 in early Toronto trading, today.
There are already headwinds which may limit additional Canadian dollar gains moving forward. Canada March GDP data was out this morning and was weaker than expected.
The Canadian dollar does not trade in a vacuum, and it will be readily apparent his morning when a host of American economic reports are released. US Personal Consumption Expenditures Price Index for April is forecast to rise 1.8% (March 1.9%) Traders will be looking for this data to see if US inflation is staying firm. Aside from that report, Initial Jobless Claims, Chicago PMI and Pending Home Sales data are on tap. As expected or better than expected reports will show that US growth is strong and provide support for the US dollar.
Look for the Canadian dollar to be primarily impacted by NAFTA negotiations and trade war talk. The Canadian dollar will be on the defensive until this situation gets sorted out.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
