USD/CAD has moved higher throughout the week and this trend continues in the Thursday session. Early in the North American session, the pair is trading at 1.3350. On the release front, Canadian GDP edged lower to 0.3%, matching the estimate. US unemployment claims sparkled, falling to 223 thousand, the fewest since March 1973. On Friday, the US releases ISM Non-Manufacturing PMI, and the markets will be listening closely as Janet Yellen and three other FOMC members deliver speeches.
There were no surprises from the Bank of Canada, which held rates at 0.50%, where they have been pegged since July 2015. However, the rate statement expressed concern, stating that the economy faces "significant uncertainties", including a lack of clarity over Donald Trump’s economic agenda. Trump has called for the NAFTA trade agreement to be scrapped, although he has since backtracked and said that he only wanted to "tweak" the provisions that affect Canada-US trade. Still, Trump’s protectionist leanings could hurt the Canadian economy, which sends 80% of its exports to its southern border. Even if NAFTA is left alone, the US could slap import duties on Canadian products, which would have negative ramifications for the Canadian economy. Meanwhile, the Canadian dollar is struggling, dropping 1.9% this week. The currency is close to an 8-week low, and USD/CAD could push past the 1.34 level this week.
There was plenty of anticipation in the air ahead of President Trump’s speech to Congress. In the end, however, the speech was short on specifics and the markets haven’t shown much reaction in the Wednesday session. Trump promised "massive" tax relief for the middle class as well as corporate tax cuts. However, he failed to provide details or even timelines on tax reform or infrastructure spending, two themes which he has discussed since the election campaign. Trump stated that he will ask Congress to approve legislation for $1 trillion in infrastructure spending, "financed through both public and private capital". Analysts noted that although Trump touched on the protectionist theme, such as the trade imbalance with China, his tone was less belligerent than we’ve seen in the past.
When will the Fed press the rate trigger? That should occur in the first half of the year, but the key question is whether the Fed makes a move at the next policy meeting on March 15. On Tuesday, FOMC members William Dudley and John Williams both hinted at an imminent hike by the Fed, which has raised the odds of a March hike at 66%, according to Reuters. Dudley said the case for a hike is compelling, while Williams noted that a rate increase will be up for "serious consideration" at the March policy meeting. The markets will be listening closely to speeches from other FOMC members this week, culminating in speeches from Janet Yellen and Fed Governor Stanley Fischer on Friday.