The Canadian dollar was caught in the middle of a war of words between U.S. President Trump and Mexico. Trump tweeted “On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,.. ….at which time the Tariffs will be removed. Details from the White House to follow.”
Markets were caught off-guard. USD/MXN soared to 19.8251 from 19.1436 for a gain of 3.56%. The Canadian dollar was not unscathed. USD/CAD jumped to $1.3540 from $1.3490 and then extended the rally in early Toronto trading.
The risk aversion sentiment wasn’t all due to Trump and Mexico. China announced measures to counter the U.S. blacklisting of Huawei corporation. China is creating an “unreliables” list. Bloomberg reported China would create a mechanism to list foreign enterprises, organizations and individuals that don’t obey market rules, violate contracts and impede supply to Chinese companies, for non-commercial reasons.
These events occurred even as U.S. Vice President Mike Pence was in Ottawa to help convince Prime Minister Justin Trudeau to get the United States Mexico Canada Agreement (USMCA) on trade, ratified. Canadians can be forgiven for asking “why bother?” since Trump seems to be ignoring it.
The Japanese yen soared on demand for safe-haven assets and a steep plunge in U.S. Treasury yields which also fueled a 1.62% decline in the Nikkei 225 index.
China Manufacturing Purchasing Managers Index slipped into contraction territory in May. The PMI index was 49.4 compared to April’s 50.1. Traders viewed that data as further evidence that global growth may be slowing.
Free-falling crude oil prices exacerbated the risk aversion sentiment. Oil traders sold West Texas Intermediate (WTI) knocking it from $59.18 U.S./barrel at yesterday’s New York open to the overnight low of $54.88/b, a loss of 7.3%.
Month-end portfolio re-balancing flows added another layer of demand. The steep decline in U.S. equity indices during May triggered U.S. dollar demand, which was evident against Sterling and the Canadian dollar.
GBPUSD continued to drop overnight, falling from $1.2627 to $1.2561 in early Toronto trading. Sentiment is extremely negative due to bearish technicals and political dysfunction raising the odds for a “no-deal” Brexit.
The Canadian dollar is under pressure. Falling oil prices, month-end demand for U.S. dollars, bullish USD/CAD technicals, and fresh risk aversion sentiment combined to undermine prices. Bank of Canada Deputy Governor Carolyn Wilkins speech in Calgary yesterday didn’t help. She repeated the BoC view that rising trade tensions are a concern for the domestic economy, which reinforced the market view that Canadian interest rates will remain where they are, at least until the late fall.
There is plenty of U.S. data as well as Canada March Gross Domestic Product on tap today, which suggests a lively month-end trading session.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians