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Canadian Dollar Down, Canadian Trade Surplus Misses Mark

USD/CAD has posted strong gains in the Tuesday session, continuing the gains which marked the Monday session. Currently, the pair is trading at 1.3170. On the release front, Canada’s trade surplus rose to C$0.9 billion, short of the estimate of C$1.2 billion. Canadian Building Permits dropped 6.6%, worse than the forecast of -3.5%. Later, in the day, Canada releases Ivey PMI, which is expected to post a strong reading of 58.3. In the US, the trade deficit narrowed to $44.3 billion, beating the forecast of $45.0 billion. On the employment front, JOLTS Jobs Openings is expected to improve to 5.56 million.

President Donald Trump has just started his term, but he continues to create controversy and his protectionist rhetoric is not endearing him to the markets. Moreover, the lack of an economic policy from the new administration is a major source of concern and the the post-election euphoria which sent the markets higher has dissipated. The Federal Reserve, which had trumpeted that it was planning a series of hikes in 2017 (sound familiar?), was more cautious in its recent rate statement and is expected to adopt a wait-and-see attitude in the coming months. If the economy continues to grow, there is a strong likelihood of another rate hike in the first half of 2017, which is bullish for the dollar. On the other hand, if Trump makes good on his promises to "make America first" and implement protectionist policies, the greenback could lose ground against major currencies.

Donald Trump’s promise of "America First" includes revisiting the NAFTA trade agreement, which has been an anchor of the US-Canada trade relationship for over 20 years. Trump didn’t mince words last week when describing NAFTA, saying that "NAFTA has been a catastrophe for our country. It’s been a catastrophe for our workers and our jobs and our companies." Although Trump is unlikely to unravel the agreement, his protectionist stance could spell trouble for the Canadian economy. With 70% of Canadian exports headed for the US, changes to NAFTA could unnerve the markets and weaken the Canadian dollar.

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