The Canadian dollar continues to have a quiet week. In the Tuesday session, USD/CAD is trading at 1.3145, up 0.07% on the day. In economic news, Canada releases Manufacturing Sales, coming off a weak reading of -1.3% in May. In the U.S, there are no major events. Federal Reserve Chair Jerome Powell testifies before the Senate Banking Committee.
After a soft first quarter, U.S retail sales reports have rebounded in the second quarter. Core retail sales were revised upwards to 0.8% in May, and the June gain of 0.5% edged above the forecast of 0.4%. Retail sales gained 0.4%, and were up an impressive 6.6% on an annualized basis. Consumer spending is a key driver of economic growth, and a tight labor markets and firming inflation are further indications that the economy is in excellent shape. The Fed is widely expected to raise rates again at the September meeting, with odds of a quarter-point hike at 87%, according to the CME Group.
The Bank of Canada raised rates by a quarter-point last week, to 1.50%. This is the highest level since December 2008. Will we see more rate hikes in 2018, as will likely be the case in the U.S? The BoC rate statement said that “higher rates will be needed” in order to keep inflation close to the target of 2 percent. Policymakers are keeping a close eye on the simmering trade war, which has seen Canada and the U.S impose tariffs on each other’s products. If the Canadian economy can escape the trade war relatively unscathed, we could see another rate hike at the BoE policy meeting in September.
The escalating trade war between the U.S and China is raising concerns not just on the equity markets but at the Federal Reserve as well. On Friday, Dallas Fed President Robert Kaplan said he would have to downgrade his economic outlook for the economy if the tariff battle continues. Kaplan said that U.S tariffs on steel and aluminum imports had dampened capital expenditures plans and further trade tensions could lead to currency fluctuations and geopolitical instability. With Fed policymakers split on whether to raise rates once or twice in the second half of 2018, the outcome of the tariff battle could have a significant impact on the monetary policy and on the direction of the U.S dollar.
