- Canada and US close to trade deal
- US Treasury intervention in long bond market weighing on greenback
- US opens with losses across the board and is down on the week.
USDCAD open: 1.3749, overnight range 1.3744-1.3791, close 1.3789, WTI 86.62, Gold 4,582.84
The Canadian dollar is firm and poised to end the week with a gain of around 1.32% this week. The prospect of a Canada-US trade agreement has nothing to do with the selling pressure.
That is coming from elsewhere, and the US Treasury deserves the credit. The US Treasury doubled the size of its 10-to-30-year bond buybacks, insisting the move was intended to improve liquidity in the less actively traded long-dated sectors.
Investors were not buying that explanation, particularly with US government debt now above $40.0 trillion and concerns about the country’s fiscal position growing. The move was also interpreted as Treasury attempting to exert greater influence over US interest rates. Bessent then poured more fuel on the fire by suggesting the buyback program could be expanded again.
Treasury yields initially dropped following the announcement, although much of that decline has since been unwound. The episode nevertheless made alternatives to US investments considerably more appealing, with gold and cryptocurrency prices surging.
The Trump administration’s 12:01 am August 22 deadline is almost here, and speculation over the final shape of a Canada-US agreement is rampant. If the reports are accurate, Canada appears to have taken a beating. US Vice President JD Vance took a swipe at Prime Minister Mark Carney, saying he had tried to “out-tough” Trump. Vance described it as “hilarious,” arguing that Carney was portraying the outcome as a Canadian victory despite having “climb[ed] down on a lot of issues.”
Reports from The Globe and Mail and other sources suggest Canada may escape the threatened 50% auto tariff but would instead face a 15% levy while US vehicles remain exempt.
The existing tariff is 25%. That is a horrible deal. It would give American automakers valuable time to rebuild domestic manufacturing, protect their workforce from an economic shock and ensure those workers remain employed heading into the midterm elections. The price would be paid by Canadian workers and, ultimately, Canada’s auto industry.
Carney has repeatedly said Canada would not accept a bad agreement or sign one “whatever the cost.” If the reported auto tariff arrangement is accurate, however, Canada appears to have done precisely that.
There is still one potential spoiler. Ontario Premier Doug Ford and the other provinces could derail the agreement by refusing to lift the US booze ban.
WTI rose from 85.81 to 87.50 in early New York trading, putting the price 8.3% higher than Monday’s level. The move reflects growing concern over US plans to ratchet up pressure on Iran. Washington is preparing measures aimed not only at Tehran but also at countries doing business with Iran, Targeting countries that trade with Iran looks difficult to enforce when China is its largest customer.
Canada Retail Sales are expected to increase 0.4% m/m on both the headline and ex-auto measures. The numbers are unlikely to attract much attention, however, with the market firmly focused on the trade negotiations.
Asian equity markets finished on a mixed note. Hong Kong's Hang Seng climbed 1.21% and Japan's Topix added 0.19%, but Australia's ASX 200 slipped 0.27%.
As of 7:30 am the German DAX is up 0.27% while the French CAC-40 and the UK FTSE 100 have gained 0.14%. S&P 500 futures are up 0.37%,and the US 10-year Treasury yield is 4.69%
EURUSD traded in a 1.1676-1.1712 range. The single currency held on to Thursday's advance and picked up a modest bid on evidence of improving factory activity. The Eurozone August PMI printed at 52.8, up from 51.9 in July.
GBPUSD bounced in a 1.3626-1.3676 band. Sterling extended its recent climb as Treasury Secretary Bessent's attempt to lean on interest rates has weighed on the greenback. Better consumer confidence figures and a firm PMI release added underpinned the currency.
USDJPY traded defensively in a 158.36-159.14 band. The currency pair is pressured by the soft tone in the greenback and firm Japanese inflation data. National CPI excluding food and energy accelerated to 1.8% y/y from 1.7% the month before.
AUDUSD was steady in a 0.7108-0.7166 band supported by bearish US dollar sentiment and less urgency for a RBA rate hike due to the latest jobs data.
