Canada's GDP contracts, US nonfarm payrolls misses forecast

The Canadian dollar continues to lose ground against its US counterpart and is trading at two-month lows. In the European session, the Canadian dollar is trading at 1.3875, down 0.13% on the day. USD/CAD has risen for six straight days, climbing 1.9% during that time.

US nonfarm payrolls for July were softer than expected at 73 thousand, compared to the forecast of 110 thousand. The June report was revised sharply downwards to 14 thousand from an initial 147 thousand.

Canada's GDP posted a small decline of 0.1% m/m in May, matching the market estimate. This followed an identical reading in April, as the economy is essentially treading water. A drop in retail trade was a significant factor in the weak GDP reading, particularly in motor vehicles and parts.

The decline in GDP in April and May can be squarely blamed on the trade war with the US, which has put a chill in economic activity. The markets are expecting a slight improvement in June, with an estimate of a 0.1% gain.

Bank of Canada points finger at US trade policy

The Bank of Canada held the benchmark rate at 2.75% on Thursday for a third consecutive meeting. The rate statement noted that US trade policy remains "unpredictable" and Governor Macklem reiterated this at his press conference, saying that "some level of uncertainty will continue" until the US and Canada reach a trade agreement.

Trump hits Canada with 35% tariff

Meanwhile, the trade war between the two sides is heating up. President Trump announced on Thursday that the US was slapping 35% tariffs on Canadian products, effective Aug. 1. The new tariff will not apply to goods covered under the US-Mexico-Canada Agreement.

Canada's Prime Minister Mark Carney said he was "disappointed" with the US decision and vowed that "Canadians will be our own best customer". These are brave words, but Carney will be under pressure to reach a deal with the US, as 75% of Canadian exports are shipped to the US and Canada can ill-afford a protracted trade war with its giant southern neighbor.

• USD/CAD has pushed above resistance at 1.3859 and is testing 1.3868. Next, there is resistance at 1.3884
• 1.3843 and 1.3834 are the next support levels