A circle reinforced after strong U.S. economic data this week as the ISM manufacturing number for August printing at 61.3, its strongest level since 2004. Another strong number is expected on Friday with Non-Farm payrolls due for release and the unemployment rate expected to fall to 3.8%.
Also, put into the naughty corner with emerging market currencies were the commodity currencies, the Australian dollar, the New Zealand dollar and the Canadian dollar. The Australian dollar and the New Zealand dollar there because of their status as current account deficit countries dependent on foreign funding, coupled with a heavy reliance on China.
While Canada is also a current account deficit country, the Canadian dollar has been under pressure this week, principally due to elevated trade tensions. After the U.S. and Mexico agreed a new trade in late August, there was an expectation that a trade agreement between the U.S. and Canada would soon follow, and that Canada would become part of a trilateral agreement. This proved to be overly optimistic and after negotiations broke down last Friday, the FX market was quick to reprice the risk of a separate bilateral agreement for Canada or even that Canada may remain outside the scope of any agreement.
Talks between the two nations resumed overnight, and with USDCAD continuing to trade near to 1.3200, it implies the market remains sceptical of the two countries being able to agree to a deal before the 30 September deadline.
Partly this is due to U.S. President Donald Trump’s claim that the reason the agreement needs to be revised is because the U.S. runs a large trade deficit with Canada. In fact, the trade deficit between goods is outweighed by a surplus in services sold to Canada, which does murky the entire U.S. – Canada trade deficit story.
With so much at stake for both sides and with a softening in the trade negotiation rhetoric overnight, it’s hard to see a deal not being struck before the end of this month. As such, while I have sympathy for the stronger U.S. dollar view and acknowledge the break higher on the USDCAD daily chart viewed below, I feel there is a risk of chasing USDCAD at current levels.
Instead, I would prefer to remain patient with a view to buying USDCAD on a dip, once a deal has been announced. Particularly if the dip can extend back towards the 1.3000/1.2850 support zone as defined by the 200-day moving average 1.2855 area.
Source Tradingview. The figures stated are as of the 6th of September 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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