USD/CAD Canadian Dollar Lower After US Demands Jeopardize NAFTA

The Canadian dollar was lower against its US counterpart on Friday. The loonie had appreciated versus the dollar all week and after the release of a disappointing US inflation data it rose even higher, but US NAFTA proposals it reversed course. The US tabled an idea a higher regional content for autos to be part of the free tariff access. Current North American content requirement is 62.5 percent and the US wants to increase that to 85 percent (with 50 percent of that being US content). Negotiations have been tense after the US also proposed a five year term for the updated NAFTA, to which both Canada and Mexico had already objected.

House resale numbers in Canada rose 2.1 percent in September pointing to a more stable market after drops in building permits and new home sales earlier in the week. Permits dropped 5.5 percent and the New House Price Index (NHPI) underperformed with a 0.1 percent gain.

The CAD managed to print a 0.40 percent gain on a weekly basis versus the USD. Oil prices rose as Chinese demand showed signs of an increase, tensions rising between the United States and Iran threatening a return to sanctions, and Iraq unrest could lead to limited supplies out of the Kurdish regions as troops are mobilizing after the vote for independence in late September.

Canadian dollar weekly graph October 9, 2017

The USD/CAD lost 0.38 percent in the last five trading days. The USD recovered some ground on Friday after the Trump administration comments on NAFTA send the CAD lower. The currency pair is trading at 1.2481 as Canadian fundamentals appear stronger in the short term. Soft inflation dealt a strong blow to the greenback as it will give further ammunition to the doves within the Federal Open Market Committee (FOMC). The U.S. Federal Reserve is still anticipated to hike the Fed funds rate by 25 basis points in December, but there has to be some improvement in economic data.

The US dollar traded lower on Friday after the consumer price index (CPI) and the preferred inflation metric the core CPI came slightly under expectations. Fed speakers had been divided in their comments leading up to the release. Doves thought it was a mistake to keep raising rates with low inflation. Hawks urged that waiting could be a bigger mistake and that inflation will eventually catch up. The disappointing data has not taken the December rate hike off the table, with the data between now and the date of the meeting to provide the final say.

The CME FedWatch tool is showing a decrease in the probabilities for a December US interest rate hike. The calculation is done using the prices of Fed funds target rates futures and it stands at 82.9 percent. One week ago it was 87.8 percent, but also worth mentioning a month ago the odds were below 50 percent for a lift at the end of the year.

Canadian data will be scarce with the main events the release of inflation data and retail sales on Friday, October 20 at 8:30 am EDT.

Market events to watch this week:

Monday, October 16
5:45pm NZD CPI q/q
8:30pm AUD Monetary Policy Meeting Minutes
Tuesday, October 17
Tentative GBP BOE Gov Carney Speaks
4:30am GBP CPI y/y
Wednesday, October 18
4:30am GBP Average Earnings Index 3m/y
8:30am USD Building Permits
10:30am USD Crude Oil Inventories
8:30pm AUD Employment Change
10:00pm CNY GDP q/y
10:00pm CNY Industrial Production y/y
Thursday, October 19
4:30am GBP Retail Sales m/m
8:30am USD Unemployment Claims
Friday, October 20
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m
7:15pm USD Fed Chair Yellen Speaks

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza