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Canadian Dollar Vulnerable to Trade War Fears, Supported by BoC

Canadian Dollar Vulnerable to Trade War Fears, Supported by BoC

Daniel Dubrovsky, Strategist

Canadian Dollar Fundamental Forecast: Neutral

  • Canadian Dollar rose on a hawkish BoC, then fell as US imposed metal tariffs on Canada
  • Retaliation from affected countries on the US tariffs and lower oil prices could hurt CAD
  • Losses may be offset by the Bank of Canada and a local jobs report, forecast is neutral

Have a question about what’s in store for Canadian Dollar next week? Join a DailyFX Trading Q&A Webinarto ask it live!

If it were not for the Bank of Canada’s actions this past week, the Canadian Dollar fundamental forecast would have been bearish. Amidst trade war fears, the threat of lower oil prices and uncertainty around Italy’s political situation, the central bank still paved the way for its next rate hike. How did it do it? The BoC dropped the reference to being ‘cautious’ on rates at this month’s monetary policy announcement.

When this crossed the wires, the Canadian Dollar soared and outperformed against its major counterparts. Local bond yields rose as BoC rate hike expectations firmed. However, this dynamic reversed course the following day when the US went ahead with imposing metal tariffs on Canada, Mexico and the European Union. These developments bring us to what is in store for CAD ahead.

The geopolitical landscape seems to favor weakness for the Canadian Dollar. Soon after the US imposed the tariffs, other countries were quick to express their displeasure and hinted at countermeasures to come. Prime Minister Justin Trudeau called it “unacceptable” as he laid out levies of US imports amounting to around $12.8 billion. Here are some events next week where we may get more responses:

Canadian Dollar Vulnerable to Trade War Fears, Supported by BoC

From the US, there could still be a chance that the Trump administration reverses course on the metal tariffs. Last weekend, Mr. Trump revived hopes that a summit with North Korea could happen. Then, after agreeing to hold off imposing tariffs on May 20, he announced $50 billion in levies in Chinese goods on May 29. The chance that Trump could change his mind on the metal tariffs adds uncertainty, but would bode well for the Loonie.

The Canadian Dollar could also be at risk if lower oil prices dent Canadian economic growth down the road. Russia and Saudi Arabia have hinted at boosting production of the commodity to make up for the anticipated supply disruption from Venezuela and Iran. On Saturday June 2nd, energy ministers will be meeting in Kuwait city to discuss OPEC plans and we could get an update there.

While these developments may hurt CAD ahead, the Bank of Canada’s policy stance may actually help keep it leveled. Towards the end of last week, BoC’s Deputy Governor Sylvain Leduc said it was too early to evaluate the impact of US steel tariffs. He reiterated that higher interest rates will be warranted. More of the same tone could be echoed at Governor Stephen Poloz’s meeting on Thursday.

On Friday, we will get local jobs data. Since late April, Canadian economic data has tended to outperform relative to economists’ forecasts. An upside surprise may bolster BoC rate hike expectations and lift CAD. With that in mind, the central bank’s commitment to policy tightening amidst the uncertain global trade environment is helping to keep the Canadian Dollar fundamental forecast more neutral.

Canadian Dollar Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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