CAD had a good two months in July and August, benefitting from a softening USD and buoyant crude oil prices, as well as broadly better than expected Canadian economic data that had traders talking about a “CAD catch up trade” that would take USDCAD below 1.3000.
On the first of September, the USDCAD cross managed this feet, crossing to lows of 1.2992 briefly (first time below 1.3000 since January).
Since then, things have not been looking so great, with USDCAD, marching back to the upside to find a new 1.3150-1.3250 range.
Two major factors have weighed on the loonie since the start of the month…
1) Crude prices have corrected to the downside (WTI has fallen to the $36-38/bbl region from around $43/bbl and Brent has fallen to around $40/bbl from around $46/bbl). Waning global demand as Covid-19 cases pick up globally (i.e. the second wave in Europe) have restricted travel and reduced the demand for fuel, something which producers have had to face up to by lowering their OSPs (official selling prices).
2) After a “frothy” finish to last month, global equities (led by big US tech companies) corrected sharply earlier on this month. The correction was driven by investor psychology (a rush to take profits following a period of excessive optimism), rather than any specific fundamentals. But the CAD/equity correction is there nonetheless, and the correction has weighed on CAD.
But another factor is coming back into play, one that has weighed on CAD for months now and was one of the reasons why CAD has been underperforming the likes of AUD, NZD, NOK and SEK.
US/Canada trade tensions!
Canada is set to announce that it is going slap retaliatory tariffs on US imports today, after in retaliation to punitive US tariffs that were imposed on Canadian aluminium imports in August.
Deputy Prime Minister Freeland said last month that Ottawa would impose sanctions on CAD 3.6bln worth of US aluminium and products containing aluminium. Though the government hasn't indicated exactly what products will be targeted, Bloomberg reports that the list of potential goods includes appliances, drink cans, office furniture, bicycles and golf clubs, according to Bloomberg. The measures would come into force by Sept 16, she added, hence why the announcement is scheduled for today.
Though the Canadian government has said it is going to respond to US trade provocation dollar-for-dollar, there is a risk that the US may want to retaliate against Canada’s retaliation – more trade barriers between the US and Canada is NOT a good thing for CAD.
Thus, CAD may continue to lag some of its other risk-sensitive peers, even if USD does soften, in the coming weeks, unless things cool off in North America.
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