Trade War Fears and the Imminent US Fed Rate Decision – USD/CAD Exchange Rate Outlook Mixed
The US Dollar to Canadian Dollar (USD/CAD) exchange rate outlook for this week is rather mixed.
On one hand, markets are preparing for the possibility of a rate hike from the US Federal Open Market Committee (FOMC) on Wednesday, with the growing momentum of the US economy prompting US Fed Chairman Jerome Powell and other Fed Presidents to be open to the idea of 4 rate hikes this year, as opposed to the bank’s initial plans for 3.
On the other hand, however, markets are currently struggling to digest news that the US is preparing an extensive range of import tariffs on Chinese goods – a move that is intended to confront China’s immense trade surplus against the US and better protect US industries.
US President Donald Trump reportedly wants to target some $60bn in Chinese products to reduce the trade disparity, though many investors are concerned that doing so would deny US industries access to Chinese goods for an extended period of time.
Some economists have argued that China is unlikely to react by retaliating, given the fact that they have a huge number of tariffs of their own on the importation of US goods, but markets are, nonetheless, anxious that confronting China could escalate to a global-scale trade war and threaten economic growth.
This outlook could limit the ‘Greenback’, but the Canadian Dollar – given the fact that they are a riskier, commodity-export based nation, is also in the crosshairs.
Risk Aversion and NAFTA Negotiations – What can we Expect for the USD/CAD Exchange Rate?
American trade officials are showing some new-found interest in a Canadian proposal for NAFTA’s revamp of automotive provisions – with Canada and the US seeking to swiftly conclude renegotiations of the free-trade pact.
For some, this is evidence that the US may be close to settling on a proposal, though markets are expected to continue to move anxiously around the Canadian Dollar until the deal is set in stone.
US Trade Representative Robert Lighthizer also expressed concern regarding a time-sensitivity of the deal, arguing that ‘time is running very short’ to get a deal before ‘political headwinds’ begin to complicate matters.
So where does this leave the Canadian Dollar?
The ‘Loonie’ could come under great pressure on four fronts; China retaliating on trade with the US and potentially escalating into things into a trade war, Wednesday’s rate decision from the US Federal Reserve, President Trump applying even greater pressure in NAFTA negotiations and Canadian data – due later in the week.
If progress is indeed revealed in NAFTA negotiations, however, then the Canadian Dollar could claw back some ground.
Volatility Likely for the US Dollar Canadian Dollar (USD/CAD) Exchange Rate on Canadian Inflation
Canada’s inflation and retail sales figures are due on Friday this week, both notable readings that could alter the Bank of Canada’s monetary policy plans.
The central bank decided against raising interest rates last week, with weaker-than-expected inflation readings in the month prior and growing uncertainty in global trade relations causing the BoC to move cautiously.
Indeed, the accompanying statement read:
‘Trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks’.
The market forecast for inflation in February, is a rise to 2% year-on-year, an event that could push the central bank back towards its recent run of hawkish policy measures, but if global trade relations grow increasingly hostile then the bank could opt for caution for even longer.
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