The Canadian dollar rose on Monday afternoon after it became clear that the Republican health care bill was facing collapse after two senators withdrew their support. As the Asian session got underway on Tuesday the loonie continued to appreciate versus the greenback with growing market concerns about the ability of the Trump Administration to push through other reforms. Pro-growth policies were a promise of the Trump campaign with tax reform and infrastructure spending driving the US dollar rally at the beginning of the year. When the Trump administration started to lose momentum and spent its political capital on divisive issues like immigration and health care other reforms were pushed further down the list.
The loonie had a strong performance last week as the USD retreated as US data disappointed with slow inflation and falling retail sales. The Bank of Canada (BoC) hiked rates for the first time in 7 years after switching the rhetoric in the past month. The Canadian benchmark rate rose by 25 basis points to 0.75 percent. The market is still pricing in a second rate hike this year, but Canadian inflation and high levels of household debt could change the mind of the central bank.
The CAD will have to wait until Friday to get a major indicator release when the Canadian retail sales and inflation data will be published. For now US political uncertainty and the "America First" objectives of the NAFTA renegotiation could have a negative effect on the Canadian currency.
The USD/CAD lost 0.441 in the last 24 hours. The currency pair is trading at 1.2595 after the US healthcare reform will not make it to the Senate floor as two more senators have come out against it. The loonie recovered from losses near the session close on Monday when the NAFTA renegotiation objectives were released by the United States.
The trade agreement will be up for review in mid-August and as part of the process, the US has to outline to the legislative branch its intentions and objectives. While the document was filled with an America First rhetoric that is the template of the Trump Administration the issue that will be a point of contention will be the focus on deficit reductions. The Mexican Economy Minister Ildefonso Guajardo has already spoken out against this "mercantilist" view of trade. The Mexican minister would rather focus on how to expand commerce, not reduce it, but also praised the US for putting forth that there will be no reintroduction of quotas and tariffs during the renegotiation process.
The USD/CAD has touched weekly lows of 1.2581 during the last five trading sessions. NAFTA uncertainty put the pair at a high of 1.2944 very close to breaking the 1.30 price level, but the anxiety about the Trump Administration’s ability to work with a Republican majority house and Senate have risen. A somewhat dovish Fed last week and weak economic indicators in the US have offered no support for the buck as it looks for next week’s Federal Open Market Committee (FOMC) meeting for further guidance.
Energy prices jumped 0.42 percent in the last 24 hours. The price of West Texas Intermediate is trading at $46.66 after Saudi Arabia published a report revealing it is considering further export cuts. The price of energy has been erratic as the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement and the rise in US shale production have offset each other.
The Energy Information Administration (EIA) published a forecast yesterday with total shale regions oil output in August rising by 113,000 barrels per day. Total output in the month could reach 5.59 million barrels per day compared with 5.5 in June. Oil prices retreated at the start of the week after gaining more than 5 percent last week.
Energy prices have been dictated by weekly changes in US crude inventories and reports from the Organization of the Petroleum Exporting Countries (OPEC) led production cut agreement. Oil rigs have increased production in the United States taking advantage of the stability provided by the production cut deal. Demand specially in China is giving optimistic signals to producers and could be the tie breaker between the two opposing forces. Oil producers that are part of the agreement will meet in Russia on July 24 to discuss the current market situation and review the compliance levels.
Market events to watch this week:
Wednesday, July 19
- 8:30 am USD Building Permits
- 10:30 am USD Crude Oil Inventories
- 9:30 pm AUD Employment Change
- Tentative JPY Monetary Policy Statement
Thursday, July 20
- Tentative JPY BOJ Outlook Report
- Tentative JPY BOJ Policy Rate
- 2:30 am JPY BOJ Press Conference
- 4:30 am GBP Retail Sales m/m
- 7:45 am EUR Minimum Bid Rate
- 8:30 am EUR ECB Press Conference
- 8:30 am USD Unemployment Claims
Friday, July 21
- 8:30 am CAD CPI m/m
- 8:30 am CAD Core Retail Sales m/m
*All times EDT
