The Canadian dollar is higher against all major currencies today. CAD is currently the strongest against the Australian dollar and the euro. Yesterday, the currency weakened against the US dollar as the buck continued to surge. While Trump walking away from the Iran nuclear deal is good news for crude oil prices, the Canadian dollar remains fairly weak.
In recent history, "petro currencies" such as the Canadian dollar and the Norwegian krone have failed to match the move up in crude oil. One big reason for this is that the US dollar is on a strengthening path. As both US growth and inflation are simultaneously accelerating, expectations for future rate hikes in the US are running high. The outlook for growth in Canada is weaker by comparison, hurting the loonie. While Canada's economy is likely to receive some help from higher crude oil prices and strong US growth, future growth is being weighed down by base effects (at this point last year, year-over-year Canadian growth was very high). As growth decelerates from its peak in 2017, the Bank of Canada is less likely to pursue further rate hikes. This is especially the case given very high household debt.
Turning to the latest NAFTA news, Mexico has offered some compromises relating to auto content rules. According to Reuters, Mexico is pitching a plan to raise North American content to 70% (versus US demands of 75%), while including a salary related component to address union concerns regarding low Mexican salaries. The proposal also called for a 10-year phase-in for the new rules. While the concession is not a breakthrough, talks are at least moving in the right direction. Our short-term and medium-term outlook on the Canadian dollar is bearish.
The USD/CAD exchange rate is currently above 1.2930. The euro is down slightly against the Canadian dollar, with EUR/CAD currently above 1.5340. The pound is flat against the Canadian dollar, with GBP/CAD trading above 1.7520.
This is a relatively light week for the Canadian dollar economic calendar. The Bank of Canada’s Lane said that growth remains "synchronized", while economies will have to cope with lower monetary stimulus in the future. Housing starts for April (214k vs. 220k expected) were below expectations. On Thursday, we’ll see the new housing price index for March and see the BoC’s Review (its quarterly publication). On Friday, the most important day, we’ll see changes in employment for April and hear a speech by the BoC’s Wilkins. Last week, GDP growth in February was ahead of expectations.