As the Canadian dollar is finishing the week with its largest drop in a year. Yesterday’s comments by Donald Trump in regard to the new tariffs being applied to US steel and aluminum imports, has added further fuel to the fire that Canada may be in a losing battle with the US in regard to NAFTA. Also, today’s Canada GDP numbers while ok, have started to show a deceleration in the economy and it seems that Canadian households are heeding the Bank of Canada’s comments on the size of their debt. Real household final consumption expenditure slowed to 0.5 percent following a 0.9 percent increase in the previous quarter. Spending was up on durable, semi-durable and non-durable goods, as well as on services.
USDCAD 1.2873, 1.2868, 1.2865 1.2908, 1.2915, 1.2920
USD-CAD ebbed back under 1.2850 after yesterday clocking a fresh two-month high at 1.2895. The pair has been subjected to mixed leads, with Trump’s tariffs proposals seen as negative for the Canadian dollar, though it remains to be seen if the U.S. administration will target the proposed levy solely on China. Fed policy expectations remains in the spotlight, too, with hawkish remarks from Fed member Dudley serving to offset the impact from Fed chairman Powell’s testimony before the Senate yesterday, where he chose to walk back some of the hawkish notes he struck at his House testimony earlier in the week. Incoming Canadian data, meanwhile, has maintained the strong case for no change from the BoC until July. We see a 25 basis point rate hike to 1.50% in July, followed by a 25 boost to 1.75% in October. The NAFTA renegotiation remains a font of uncertainty for the Canadian economy. We advise trend following USD-CAD for now. The pair’s technical bull trend credentials, in evolution since early February, are strong, both by Dow theory’s higher highs and higher lows yardstick and by a rising RSI momentum indicator (14 day), which is strengthening while still being short of “overbought” levels. Support comes in at 1.2807-10.
The euro has been buoyant despite political risks. EUR-USD clocked a three-day high at 1.2298, extending the rebound from yesterday’s seven-week low at 1.2154, and while the euro still registering losses versus the dollar and yen this week, it has posted gains versus most other currencies over this period, including the pound and the dollar bloc units — reflecting a sanguine market view of political risks going into Italy’s general election this Sunday. The results of Germany’s SPD postal ballot of party members on whether to endorse their participation in a new grand coalition with the CDU and CSU are also due this Sunday, where a Reuters poll this week found 56% of SPD members in favour, while Environment Minister Hendricks, of the SPD, said she expects support of 60%. The outcome of Italy’s election is less certain with there being a high degree of undecided votes and a crowded field of participants. How well anti-immigration Eurosceptic parties, such as the Five Star Movement and Northern League, will be an issue, but the likelihood is there will be a hung parliament outcome. We retain a bearish view of EUR-USD, looking for the pair to close the week today below trend resistance at 1.2301-02 to affirm the credentials of the bear trend that’s been evolving since mid February.