According to the July Monetary Policy Report, the BoC expects the global economy to grow by about 3.75 percent in 2018 and 3.5 percent in 2019. The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. This is contributing to financial stresses in some emerging market economies. Meanwhile, oil prices have risen. Yet, the Canadian dollar is lower, reflecting broad-based US dollar strength and concerns about trade actions. The possibility of more trade protectionism is the most important threat to global prospects.
The Canadian dollar rallied on this news and so did oil prices on the plunge in inventory numbers, however, it was all taken away when the White House unexpectedly announced that it was poised to place tariffs on almost half of the products the U.S. imports from China. The Canadian dollar is now weaker and oil prices have fallen as much as 2.1% so far this morning. The one thing that markets hate the most is uncertainty, and as a result, traders are selling their currency positions and buying USD and will likely stay that way till the trade wars blow over.
USD-CAD has settled back above 1.3100 over the last day after posting a three-week low at 1.3066 on Monday, which extended the correction from a one-year high that was pegged at 1.3387 in late June. Expectations for the BoC to hike rates today, along with the recent big surge in oil prices, had buoying the Canadian dollar, though this theme now looks to have come to a pause. We expect the BoC to hike interest rates by 25 bp, which would take the overnight target rate to 1.50%. The accompanying monetary policy report should be consistent with additional rate increases, though at a gradual pace. USD-CAD has support at 1.3053-55, and resistance at 1.3150-53.
EUR-USD lifted back above 1.1700 after pegging an intraday low at 1.1695, which is 5 pips shy of yesterday’s three-session low at 1.1695. We continue to see the pair as being in a broadly consolidative phase, which has been unfolding for over a month now, and which followed a six-week down phase from levels above 1.2400. The range over this period has been 1.1508 to 1.1851. More of the same looks likely for now. A major “known unknown” is to how deep and how prolonged the Trump-led trade war with major economies will be, and what economic and currency market fallout this will cause. This is, for now, curtailing directional commitment.