The Canadian dollar is strengthening against all major currencies except the euro and the British pound today. The loonie is currently the strongest against safe haven currencies including the US dollar and the Japanese yen. Last week, CAD ended the week higher and made its biggest gains towards the end of the week. The primary driver of the move was weakness in the US dollar. After we warned that the US dollar was looking overbought last week, the buck has been selling off.
Turning to recent NAFTA developments, this is an important week thanks to the upcoming May 17 deadline. Last Friday, we wrote that US House Speaker Paul Ryan set this Thursday as the final deadline for a NAFTA agreement that can be voted on in the current US Congress. There are no major updates from recent negotiations over the weekend. Last Friday, a Reuters story claimed that big differences remain between the three sides. Major issues including US demands for higher North American auto content and a 5-year sunset clause remain outstanding.
While NAFTA-related risks have had a limited impact on the loonie so far, this is likely to change this week. Given Canada's significant trading relationship with the US (75% of all Canadian exports are destined for the United States), the risk of Trump walking away from NAFTA is likely to weigh on the currency. If the NAFTA agreement is eliminated, the loonie will ultimately adjust for lower exports in the future by weakening. The US dollar, on the other hand, is more likely to strengthen as foreign imports fall. For now, our short-term outlook on the Canadian dollar is bullish, while our medium-term outlook is neutral.
The USD/CAD exchange rate is currently above 1.2770. The euro is up slightly against the Canadian dollar, with EUR/CAD currently above 1.5290. The pound is up slightly against the Canadian dollar, with GBP/CAD trading above 1.7340.
In this week’s Canadian dollar economic calendar, we’ll see retail sales and inflation figures for April. On Wednesday, we’ll hear a speech by the BoC’s Schembri. On Thursday, we’ll see cross-border portfolio investments as well as the BoC’s quarterly publication (Bank of Canada Review). On Friday, the most important day, we’ll see retail sales for March and the consumer price index for April. Last week, Canadian employment figures for April missed expectations.
As the Canadian dollar makes gains, we are now neutral on the currency in the medium-term. Looking at a weekly chart, the currency is trading within normal conditions. This is based on various technical indicators on the Canadian dollar currency index.