The introduction of import duties on cars from Canada will be a strong argument for the attack of the USD/CAD bulls

The main loser of the G7 summit was the Canadian dollar. The eccentric Donald Trump, who, prior to boarding a plane to Singapore to meet with the leader of North Korea, expressed support for the ideas of the community and already refused to sign the final communique in the air, called Justin Trudeau "dishonest and weak" and threatened tariffs for car imports. When the Prime Minister is trampled into the mud, not only the currency, but the whole country reacts. The USD/CAD opened a week by June 8 with a gap, and one can not doubt that the reason was not the correction of oil, but the angry tweets of the leader of the White House.

If not for the problems with NAFTA, the Canadian dollar would look like a tidbit for investors. In mid-2017, the BoC announced the start of the cycle of normalization of monetary policy, several times increased the overnight rate and is ready to bring it to a neutral level of 3%. The futures market expects two more acts of monetary restriction before the end of this year, especially after at the May meeting, the central bank expressed optimism about the ability of the economy to adapt to higher borrowing costs and about GDP recovery during the remainder of 2018. Indeed, when exports in April reach a record level against the backdrop of the rapid rally of Brent and WTI and neutral dynamics of the loonie, unemployment wanders near the minimum mark since the 1970s, and inflation is confidently moving up, you can afford some hawkish rhetoric.

Alas, but what inspired confidence in the bright future of Canada can become its tombstone. If Donald Trump's dissatisfaction with Justin Trudeau turns into import duties on cars from Canada, the problems of non-energy exports can discourage BoC from raising the overnight rate for a long time, which will push the USD/CAD quotes above the psychologically important level of 1.3. Exports to the United States accounts for three-quarters of the country's total exports, while Ottawa and Mexico City sell the largest number of cars in the world to the United States.

Dynamics of Canada's exports and imports to the US
   
Source: Financial Times. 


Imports of cars to the US

Source: Bloomberg. 

The report on the labor market of the Maple Leaf Country for May was quite ambiguous too. Contrary to the forecasts of Bloomberg experts, employment went to the red zone for the second consecutive time, while the average wages accelerated from 3.3% to 3.9%, which is the best dynamic since 2009. For five consecutive months, the indicator has increased by 3% and above, which signals the proximity of the economy to full employment and further acceleration of inflation.

The dynamics of employment and wages in Canada

Source: Bloomberg.

Thus, the Bank of Canada is in an extremely uncomfortable position. Statistics allow it to continue the cycle of monetary policy normalization, while international risks, including uncertainty in NAFTA negotiations, force it to think twice. Without a spring in the relations between Washington and Ottawa, the USD/CAD bears will have a hard time returning the pair's quotes to support at 1.275. Only a successful assault on this level will open their way south.


 

The loonie has made Trump cross

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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