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Canadian Dollar Edges Higher, BoC Decision Looms

The Canadian dollar has edged higher in the Tuesday session, after sharp gains at the start of the week. Currently, USD/CAD is trading at 1.3179, down 0.14% on the day. On the release front, the sole event in Canadian Labor Productivity, which is expected to drop to 0.4%. On Wednesday, the Bank of Canada is expected to maintain the benchmark rate at 1.75%.

The Canadian dollar started the week with sharp gains, after the U.S. and China agreed to a truce in the tariff war. Investors gave a thumbs-up to a crucial meeting at the G-20 summit between President Trump and Chinese President Xi Jinping. The two leaders agreed to suspend any further tariff moves until March 1. Trump had threatened to raise tariffs on all Chinese products from 10 percent to 25 percent on December 1, and news of the suspension between the world’s two largest economies triggered sharp rises in the equity markets and boosted trade-dependent currencies, including the Canadian dollar. However, the optimism over the reprieve has proven to short-lived, as Asian and European stock markets are lower on Tuesday. Will the Canadian dollar follow suit? China and the U.S. remain far apart on a number of issues, including repeated charges by the U.S. that China is engaged in theft of U.S. intellectual property. The markets have been very sensitive to the trade dispute, and the upcoming negotiations between the U.S. and China, with the likely ups-and-downs, will likely have a significant effect on the fortunes of the Canadian dollar.

Just a few weeks ago, there was a strong likelihood that Bank of Canada would raise interest rates for a fourth time this year at the Wednesday policy meeting. However, the ongoing global trade war has taken a bite out of Canadian exports, and a more dovish Fed has lessened the pressure on the BoC to continue raising rates. There are other factors which lean against raising rates at the Wednesday meeting. The most recent GDP release disappointed with a 0.2% decline, the first month the economy has contracted since January. As well, falling oil prices have dampened inflation expectations,

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