The Canadian dollar is steady in the Tuesday session, after posting losing sessions for four straight days. Currently, USD/CAD is trading at 1.2822, down 0.22% on the day. The Canadian dollar remains under pressure and has lost 2.2% since April 18. On the release front, there are no Canadian events. In the US, the key event is CB Consumer Confidence, which is expected to dip to 126.0 points. As well, the US releases housing and manufacturing reports. On Wednesday, BoC Governor Stephen Poloz will testify before the Standing Senate Committee on Banking.
The US dollar started the week with broad gains and the Canadian dollar has dropped to its lowest level since April 18. The catalyst for the greenback rally was higher yields for 10-year US treasury bills, which rose to 2.996% on Monday. Higher yields for US-T bills have made them more attractive than European or Japanese counterparts and pushed the US currency higher. With oil pushing above $70 a barrel, there are concerns that inflation will rise, which has pushed bond prices lower and yields upwards. The dollar has also benefitted from a reduction in geopolitical risk, with an easing of tensions between North and South Korea, and a lull in the conflict in Syria.
The Bank of Canada maintained the benchmark rate of 1.25% last month but hinted that more rate hikes are on the way. Inflation has crept closer to the BoC target of 2 percent, and the employment market remains tight. Still, the protectionist stance of the US administration remains a major headache for policymakers. President Trump has taken on China and the tit-for-tat tariff battle between the US and China has raised fears of a trade war which would be disastrous for Canada. As well, the Canadian government is in tough in negotiations over a new NAFTA agreement, with the US threatening to walk away if it isn’t given major concessions. Ideally, the bank would prefer to hold off on a rate hike until the NAFTA issue is resolved. At the same time, the Federal Reserve is expected to raise rates at least twice more in 2018, and if the BoC does not increase rates as well, the Canadian dollar could fall sharply against a US currency that would be more attractive to investors.
