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CAD Undermined by US Auto Tariff Threat. Hawkish BoC, So What?

CAD Undermined by US Auto Tariff Threat. Hawkish BoC, So What?

2018-07-13 05:16:00
Daniel Dubrovsky, Analyst
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Canadian Dollar Fundamental Forecast: Bearish

  • Canadian Dollar fell despite hawkish BoC, undermined by trade war fears
  • US potentially imposing auto import tariffs could result in more CAD losses
  • Local economic data still tending to underperform, CPI miss could be next

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

As anticipated last week, the Canadian Dollar headed lower against its US counterpart by the end of Thursday’s trading session. However, its weakness was not because of a ‘dovish hike’ from the Bank of Canada. In fact, the central bank appeared to be all but dovish. Not only did it raise interest rates, but it also alluded to more hikes down the road amidst the current vulnerable global trading environment.

As a result, the Canadian Dollar rose, but gains were short lived. Instead of basking in the prospects of higher rates, CAD was left vulnerable. Falling oil prices, stocks tumbling across the world and a stronger US Dollar signaled market concern about global growth slowing as President Donald Trump threatened to impose additional $200b in Chinese import tariffs. Since then though, those frets have cooled somewhat.

This presents a curious scenario for the Canadian Dollar going forward, and one that may not bode well. Next week, the US Commerce Department will lead two days of hearing about whether or not auto imports pose a national security threat. BoC’s Governor Stephen Poloz has said that those auto tariffs would have a much bigger threat on the economy.

This is because car tariffs could mean slowing economic growth and higher prices. Mr. Poloz added that in regards to this analysis, the inflation part would dominate discussions. As such, the central bank could very well press ahead with raising rates down the road even if the world’s largest economy pushes ahead with those auto levies.

But before you may get hyped up on the prospects of higher returns from Canada and potential Loonie gains, keep in mind of what happened this past week. If trade war concerns dominate headlines again, there could be more crude oil/stock declines & USD gains. Not to mention that auto tariffs could weigh on oil further given that less demand for cars as a result means potentially fewer needs to power those vehicles.

According to Natural Resources Canada, energy’s nominal GDP contribution to the economy was about 10 percent in 2016. This is why CAD sometimes closely inversely follows crude oil prices. In addition to the threat of US auto tariffs, keep an eye out for Friday’s local inflation report. The BoC has reiterated that they are guided by incoming economic data for the timing of its next rate move.

Canadian economic statistics are still tending to underperform relative to economists’ expectations, albeit by an increasingly smaller margin since late-June. There could a chance that weaker CPI pushes BoC rate hike bets further out, thus weakening the Canadian Dollar. With that in mind, the uncertain global trading environment could negate gains from hawkish BoC bets. The fundamental forecast remains bearish.

We recently released our 3Q forecasts for crude oil in the DailyFX Trading Guides page

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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