The Canadian dollar has had a good week. Last Friday, USD/CAD was probing resistance in the $1.3280 area amidst fears of escalating trade tensions and a collapse of the North American Free Trade Agreement (NAFTA). Today, the agreement between President Trump and European Union Council President Jean-Claude Juncker to reduce trade barriers struck on Wednesday has put the NAFTA negotiations in a better light.
Trump agreed to suspend tariffs on car imports, although he was unclear it the suspension applied to just the E.U. or it was for all cars imported.
Canadian dollar traders appear to have assumed the best outcome-no car tariffs for Canada. The Canadian dollar rallied, in part because diminished trade risks from the cancellation of NAFTA, gives clear sailing for the Bank of Canada (BoC) to raise interest rates. The BoC suggested that the shroud of uncertainty over trade hampered monetary policy decisions.
Oil prices have provided the Canadian dollar with another layer of support, albeit modestly. WTI oil prices have climbed from $58.05/barrel in February to $75.15/b at the end of June. Prices came under renewed pressure in July due to increased the Organization of the Petroleum Exporting Countries' production and fears that trade tensions would reduce demand. Oil prices are being supported by hostile rhetoric from Iran, who is threatening to disrupt oil shipments through the Strait of Hormuz.
The Canadian dollar is getting indirect support from the European Central Bank (ECB). Yesterday’s ECB policy meeting was a non-event for FX markets. They left interest rates unchanged and reiterated that non-standard monetary policies would conclude in December 2018. FX traders had been anticipating that ECB President Mario Draghi would provide some clarity as to the timing of the next rate hike and had been buying EUR/USD. He didn’t. EUR/USD dropped and has been falling ever since. The Canadian dollar benefited from EUR/CAD sales and widening Canada/E.U. interest rate spreads.
The Canadian dollar may be vulnerable to a profit taking selloff today. It has gained 1.8% against the U.S. dollar this week and traders may want to book some profits
U.S. Q2 gross domestic product data is due later this morning. This data series has been eagerly awaited thanks to President Trump’s comments. The President has been accused of leaking employment report data before, and markets are concerned that is recent comments are more of the same.
Yesterday, at a steel plant, the President talked about GDP, implying the numbers would be very strong. His remarks added fuel to the fire as all week, analysts have been upgrading their forecast for this morning’s report. The consensus forecast is for Q2 GDP to rise 4.1% however, more recent predictions project a gain between 4.3% and 5.0%.
A robust Q2 GDP print would knock the Canadian dollar for a loop. However, the downside may be limited as USD/CAD technicals are bearish and there a plenty of Canadian dollar buyers waiting in the wings.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
