NY Open: Why the Bank of Canada fears the trade war

The US dollar opened in New York with losses across the G10 major currency spectrum except against the Canadian dollar. Expectations that the Federal Open Market Committee will execute a “dovish” hike on Wednesday gave the major currencies a boost at the expense of the greenback. That wasn’t the case for the Canadian dollar. USDCAD is bid. Free-falling oil prices and a nervous Bank of Canada underpinned prices.

BoC governor Stephen Poloz warned in a Globe and Mail interview that an escalation of the US/China trade war such as an increase in tariffs to 25% would create a burst in inflation that central banks would find difficult to contain. Closer to home, the BoC is still concerned about the impact of low oil prices on the Canadian economy. WTI oil broke below $50/barrel yesterday, touched $47.87/b in Europe and is trading at $48.58/b. USDCAD hovered around 1.3400 in early trading but climbed to 1.3427 when Canada October Manufacturing Shipments were -0.3% m/m. (Forecast 0.4%)

The greenback managed to claw back some of its overnight losses in New York trading helped by a better than expected housing report. November Housing Starts rose 3.2% compared to October's revised negative 1.6%.

Wall Street bounced at the open recovering around half of yesterday’s drop in a few minutes. The question is “will it last?” December has seen many days when opening gains became closing losses. Today’s Wall Street Journal editorial urges the Fed to take a prudent pause in raising rates.

President Trump agreed and tweeted “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

Traders may be buying stocks in hopes that the Fed heeds the Trump and WSJ suggestions.