The Canadian dollar has edged lower on Tuesday. Currently, USD/CAD is trading at 1.2870, down 0.73% on the day. On the release front, there are no major US indicators. Canada will release Ivey PMI. On Wednesday, the US releases ADP nonfarm payrolls. Canada publishes trade balance and the Bank of Canada will set the benchmark rate.
The Canadian government is seeing red after President Trump has threatened to impose stiff tariffs on Canadian steel imports. Canada is the top exporter of steel to the US, accounting for some 16% of US steel imports. The “tariff tussle” could prove to be a major irritant in US-Canada relations, and has weakened the Canadian dollar, as USD/CAD broke above the 1.30 line on Monday, for the first time since late June. Trump is facing strong opposition to the move from Republican lawmakers, and has held our a carrot to Mexico and Canada – if a new NAFTA deal is reached, both countries would be exempted from the tariffs. Canada’s steel industry is a crucial backbone of the economy, and if the US does slap on the tariffs, it could ignite a trade war with Canada and other US trading partners.
Canada’s economy slowed down in January, as GDP posted a weak gain of 0.1%, matching the estimate. On an annualized basis, growth in the fourth quarter was 1.7%, considerably lower than the Bank of Canada’s most recent projection of 2.5%. With the Fed expected to raise rates up to four times in 2018, the BoC will be pressed to match rate hikes with its southern neighbor, or risk having the Canadian currency head lower. Currently, the BoC is projecting only two rate hikes in 2018. Strong growth has propelled the BoC to raise rates three times since July, but there are some factors weighing against a rate hike before May. First, fourth quarter expansion may fall short of the BoC’s forecast of 2.5%. As well, the future of NAFTA remains unclear, as negotiations between Canada, Mexico and the US have floundered. If the US decides to pull out of NAFTA, the repercussions on the Canadian economy could be significant, and the BoC will have to delay any plans to raise rates.
