Canadian Dollar Jumps to 10-Week High as US-Mexico Reach Trade Deal

Fundamental analysis of Forex market

The Canadian dollar has gained ground on Tuesday, after posting strong gains on Monday. Currently, USD/CAD is trading at 1.2919, down 0.37% on the day. On the release front, the U.S releases CB Consumer Confidence, which is expected to drop to 126.6 points. There are no Canadian events on the schedule. On Wednesday, the US releases Preliminary GDP and Pending Home Sales, while Canada publishes current account.

The Canadian currency continues to rally, in response to the dramatic announcement that the U.S and Mexico have reached a new trade deal. USD/CAD has dropped 1.2% since Friday, and the pair is at its lowest level since mid-June. Under the new agreement, Mexican car plants will continue to manufacture their cars and send them on to the U.S and Canadian markets without the imposition of heavy tariffs. This agreement comes after months of escalating trade tensions, which have shaken global equity markets. The next likely step is for Canada to join the U.S and Mexico as part of NAFTA 2.0. However, President Trump doesn’t appear in a rush to extend the deal to Canada, and there will be intensive negotiations before Canada can rejoin the club. Still, Mexico has formally asked the U.S to include Canada in the agreement, and the rise in the Canadian dollar indicates that the markets expect Canada to reach an agreement with the U.S and Mexico.

Federal Chair Jerome Powell was the keynote speaker at the Jackson Hole Economic Symposium. Powell’s dovish remarks on Friday sent the U.S dollar broadly lower and the Canadian dollar jumped on the bandwagon and ended the week with gains. Powell reiterated that the Fed would continue its policy of gradual interest rate hikes, saying that a cautious approach was prudent. The Fed has faced criticism about its current policy from all sides – some analysts have argued that the Fed has been too aggressive, given weak inflation, while others say the Fed should tighten more quickly, due to the extremely tight labor market. Powell appeared to take a middle approach of raising rates, but slowly. The Fed has already raised rates twice this year, and a September hike is practically a given, with the CME Group estimating the odds of a hike at 96%. The odds of a December hike currently stand at 66%.