With the majority of investors having already priced in a rise in Canadian interest rates this month the Bank of Canada’s decision was unlikely to have shocked. Following Canada’s bumper employments change data, the probability of the bank raising their interest rate was judged to have been at around 70%. This news had seen the CAD prosper and driven the USD/CAD exchange rate lower, the movement has naturally assisted further with the rise be actioned.
As mentioned above and in previous articles, the strength of the Canadian unemployment has been a huge attribute in boosting the economy. Januarys month figures surpassed expectations significantly. In total Canada’s economy has benefited from over 422k finding employment of some description in 2017 a huge shot in the arm, these high employment change levels attributing to Canadian unemployment falling to 5.7% the lowest in forty years.
At a risk of discussing the same topics, we once again have to consider NAFTA negotiations which put simply remain at a standstill, with all involved clearly having something to lose its staggering at the slow pace at which developments are being made.
Trump clearly doesn’t deem NAFTA as a priority or clearly wants to aggressively negotiate a better deal and has adopted the hardball technique which one would imagine has served him well previously.
Experts still believe a deal will be struck, with a recent Reuters poll showing that of 45 leading economists only 4 believe the pact will be dissolved.
The head of Canadian and Mexican economics Carlos Capistran at Bank of America Merill Lynch claimed:
“We expect a modernized agreement after a bumpy and lengthy negotiation and approval process,”. “It will be an update … with marginal changes. The bulk of it will remain the same.”
The sixth round of talks begin in Montreal this Tuesday, it is understood one of the key topics will be plans surrounding increased auto production in the US.
The continuation of the trade agreement will surely require a softening of approach from the US. The agreement which currently delivers an estimated $1 trillion of trading business for Canada the US and Mexico; the annulment would almost certainly see the USD/CAD exchange rate rise significantly with the Mexican Peso and Canadian dollar forecast to bear the brunt of a termination of the agreement.
In the final trading days of last week, investors saw oil prices fall from highs of $70 dollars a barrel. The CAD rate followed the movement and USD/CAD exchange rate corrected in US dollars favour. The oil price dip occurred as the International Energy Agency (IEA) confirmed that US oil production growth should offset the plunge in Venezuela.
Oil prices fell from 3-year highs this week following the statement from the IEA. The Canadian dollar’s strength is closely linked to the price of oil with the majority of the nation’s trade being linked to oil and energy. A large proportion of this is sold to the US, therefore, the correlation between oil prices and the USD/CAD exchange rate is even more prominent.
The Bank of Canada has confirmed that the Canadian economy is nearing capacity, whilst infrastructure plans have been adopted to ensure that employment and growth prosper, the bank of Canada has also put the real impetus on the creation of new businesses in order to continually boost the economy. Areas of interest include technology and globalization, whose implications are also being monitored in relation to inflation and wage growth. Diversification and the move away from energy based services and products will be paramount if a resurrection in NAFTA negotiations isn’t found quickly.
Another key contributor to the USD/CAD exchange rate this week was the accompanying minutes from Governor Stephen Poloz. Governor Poloz immediately aired on the side of caution highlighting the potential termination of NAFTA as a key risk to the Canadian economy as well as the US.
In light of the uncertainty surrounding NAFTA Poloz stated that the Bank of Canada would remain cautious in regard to future interest rate rises. Highlighting that raise interest rates too quickly or indeed too slowly could be of detriment to the Canadian economy. Investors had anticipated further Canadian interest rate hikes this year, from the Governors tone this will only be possible if NAFTA is renewed, Inflation rises from its core level of 1.3% and that data continues to improve.
The USD/CAD exchange rate fell from 1.2460 to 1.2385 however the Canadian dollar’s strength was short lived. The CAD fell victim to Governor Poloz’s natural pessimism surrounding the failing NAFTA negotiations and future interest rate rises. Understandable when 32% of Canada’s trade is linked to the US and therefore a huge contributor to trade and therefore growth. The final part of the week saw oil prices fall from their three year high which concluded the correction in USD/CAD exchange rates.
Some experts are now tipping Oil prices to remain at around the $60 a barrel mark; this in the short term could see the USD/CAD Exchange rate decline stabilise. The currency pair has traded between a high of 1.3749 and a low of 1.2110. Fridays markets close saw the USD/CAD 1.2494.