The Canadian dollar has posted small gains in the Friday session. Currently, USD/CAD is trading at 1.2919, down 0.14% on the day. On the release front, it’s a busy day on both sides of the border. Canada will release key consumer spending and inflation data. CPI is expected to fall to 0.4%. Retail Sales and Core Retail Sales are expected to post gains of 0.9% and 1.1% respectively, after both posted declines in the previous releases. In the US, durable goods reports are expected to rebound after posting declines in January. Core Durable Goods Orders is expected to rise 0.5%, and durable goods orders is forecast to climb 1.6%. On the housing front, New Home Sales is expected to improve to 621 thousand.
Canada is heavily dependent on exports, so the specter of a global trade war could be disastrous for the Canadian economy. There is considerable worry in Ottawa, as US President Trump seems intent on “righting wrongs” in US trade balances by applying the hedge hammer of tariffs. On Thursday, US President Trump slapped 25% tariffs on up to $60 billion worth of Chinese imports on Thursday. For its part, China wasted no time in threatening to retaliate, saying it was planning to impose tariffs on 128 US products, which amounted to $3 billion in imports. The tariffs directed against China come on the heels of tariffs on steel imports coming into the US, although the US has exempted Canada and some other countries. There is serious concern that these moves could ignite a global trade war, and a downturn in the Chinese economy could spread and cause a global recession.
A major headache for Canadian policymakers is the NAFTA trade agreement, which the US has insisted at reopening and inserting more favorable terms for the US. Otherwise, the Trump administration has threatened to withdraw from NAFTA. The specter of the free-trade agreement being cancelled has weighed on the Canadian dollar for months. However, there was good news this week as US has dropped its demand that vehicles produced in Canada or Mexico, destined to the US, contain a minimum of 50% US content. This demand was one of the key sticking points in the negotiations, and its removal should speed up talks on the renegotiated NAFTA agreement. The positive shift in negotiations has boosted the Canadian currency.
As widely expected, the Federal Reserve raised rates by a quarter-point on Wednesday, bringing the benchmark rate to a range between 1.50% and 1.75%. The markets were looking for any clues with regard to the pace of rate hikes in 2018 – currently the Fed is projecting three hikes, but a robust US economy could push the Fed to press the rate trigger four times. The rate statement did not directly address the issue, but there was a refreshing lack of Fedspeak from policymakers, who said that “the economic outlook has strengthened in recent months”. This phrase has not been used in previous rate statements, and if Fed policymakers reiterate positive sentiment towards the economy, could push the US dollar to higher ground.
