USD/CAD – Canadian Dollar Struggles to Rally

Canadian dollar demand is lagging that of the other commodity currencies and rather dramatically. Since Friday, the Australian dollar has risen 3.1%, the New Zealand dollar gained 1.75%, and the Canadian dollar eked out a 0.80% gain. That is due to several factors.

Reserve Bank of Australia Governor Philip Lowe said this week that the domestic economy had “turned a corner,” while pointing out that the currency’s value reflected fundamentals. He also suggested that there was little risk of lower rates any time soon. Australia and New Zealand are also benefiting from the rebound in China’s economy as China is their largest trading partner.

Canadian dollar gains are hampered by oil prices, domestic economic issues, and a government with a soaring budget deficit, and no plan to address the shortfall. The Organization of the Petroleum Exporting Countries and Russia agreed to remove the emergency 2.2-million-barrel/day production cut that was initiated in April, by August 1. Oil prices had risen in anticipation of the news, but the rally stalled at $42.35/barrel. Upside momentum has been capped by the renewed outbreak of coronavirus in the U.S., Hong Kong, and Australia. Traders are concerned that crude demand will lag that of supply, especially with the added production.

Federal Finance Minister Bill Morneau forecast that Canada’s 2020 budget deficit would be over $343.0 billion. It will be higher, especially after the government announced extensions to some of the COVID-19 income relief programs. The government also announced that the U.S./Canada border would remain closed to non-essential travel, until August 21.

U.S. President Trump isn’t helping matters. He slapped new tariffs on Canadian aluminum imports, and escalated U.S./China tensions. Trade and China were the foundation of his 2016 election campaign, and his poor polling scores suggest he has dusted off the same playbook for the 2020 election.

The U.S. ordered China to close its Houston Consulate.

The Americans said it was necessary to protect American intellectual property and private data. At the same time, they are asking China to step up purchases of U.S. agricultural products as agreed in the Phase 1 trade pact.

Canada inflation data is on tap today. It will be a non-event as the Bank of Canada predicted a low inflation environment for a while, so today’s results will not have any impact on monetary policy.

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