The Canadian dollar has posted modest gains this week against the greenback, and continues to move higher in the Friday session. Currently, USD/CAD is trading at 1.2772, down 0.21% on the day. On the release front, it’s a quiet end to the week. Canada will release Manufacturing Sales, which is expected to post a strong gain of 0.9%. In the US, the key event is the Empire State Manufacturing Index, with the markets predicting the indicator will soften to 18.8 points.
The Canadian dollar jumped on the currency bandwagon on Wednesday, as the US dollar was broadly lower after the Federal Reserve raised rates by a quarter-point. This marked the third rate hike in 2017, testimony to the strong performance of the US economy. The Fed statement was optimistic about the economy, noting that the labor market "remained strong". It also lowered its unemployment forecast in 2018 from 4.1% to 3.9%, and revised growth for 2018 from 2.1% to 2.5%. Despite this rosy prognosis, the US dollar was broadly down after the announcement. Why? One reason is the sore point in the economy – inflation. The Fed has not changed its September forecast for rate hikes next year, with the Fed dot plot indicating that three rate hikes are projected for 2018. This disappointed some investors who would like to see four increases next year. As well, the rate statement said that the Fed did not expect the tax reform legislation to have any long-term effect on the economy, contradicting White House claims that the legislation would trigger substantial growth in the economy.
The Canadian currency also received a boost from BoC Governor Stephen Poloz, who spoke at an event in Toronto on Wednesday. Poloz presented an upbeat assessment of the Canadian economy, and indicated that there is more room for rate hikes next year. With the Fed raising rates this week, and almost certain to do so again at the January meeting, the BoC will be under pressure to increase rates early in 2018, or the Canadian dollar could take a tumble.
Will President Trump get his tax reform bill on the books before Christmas? The House and Senate are currently working on a reconciliation bill, which would Trump hopes to sign before Christmas. With the Republicans losing a precious Senate seat in Alabama this week, their majority in the Senate has shriveled to just two seats (51-49), so every vote is crucial. Republican senator Mario Rubio has indicated that he might not vote for the tax bill unless child credits are raised, and this has stoked concerns on global markets that the bill might get stalled, which would be a disaster for Trump and could send stock markets sharply lower. The countdown in Washington continues, as a final bill could be unveiled on Friday, with a final vote next week.
