USD/CAD Canadian Dollar Rises After Bank of Canada Rate Hike Comments

The Canadian dollar rose on Thursday after Bank of Canada (BoC) Deputy Governor Carolyn Wilkins said that a breakdown in the US-Canada trade talks would not keep the central bank from raising interest rates.

The loonie had been under pressure for most of the day as comments out of Washington were not conclusive about the fate of the NAFTA 2.0. The Canadian central bank had kept interest rates unchanged on Wednesday giving little support for the currency. The comments from Deputy Governor Wilkins are a shot in the arm for the Canadian dollar ahead of employment data out of Canada and the United States on Friday.

The USD/CAD fell by 0.18 percent and is trading at 1.3153 with the BoC keeping its eye on inflation. Higher interest rates are need to achieve the CB’s target and Wilkins mentioned that sometimes trade protectionism could stoke inflationary pressures if consumer prices go higher.

usdcad Canadian dollar graph, September 6, 2018

Big issues remain on the table for the US and Canada and an instant negotiation was always a long shot. The deal struck by the US and Mexico took advantage of a Mexican presidential aftermath that eased negotiations to reach a bilateral deal.

Mexico and Canada remain committed to a trilateral NAFTA agreement. Comments from President Donald Trump about a short deadline for NAFTA and rebuking China’s trade talks has once again put pressure on the CAD and the MXN.

Mexican officials said today that NAFTA will not be an agreement until Canada signs on. Economy Minister Guajardo has pushed for Canada to rejoin the talks and eventually enter into the same agreement it now has with the US.

The loonie rose as positive comments hit the wires. Trade negotiations between the US and Canada have had their fair share of finger pointing, but so far they have agreed to keep comments to the press to a minimum which has helped keep the deal on the table.

Market reaction has been mixed as while the deal struck between US and Mexico was a positive for global trade, the US has toughen its stance on Chinese goods, with a new round of tariffs waiting in the wings. China is expected to retaliate escalating the trade war between the two economies and dragging down global growth forecasts.

The Mexican peso is extremely sensitive to NAFTA news as the agreement between US-Mexico has shielded the currency from most of the negative effects of the emerging market contagion. A flight to safety has investors buying the big dollar as they liquidate their peso denominated assets.

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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