The Canadian dollar started its downward trend against major G10 rivals yesterday even as the federal government brought a motion that would approve the historic USMCA (US-Mexico-Canada Agreement). One of the reasons for the weakness seen in the loonie is that the Bank of Canada (BOC) is not anticipated to hike interest rates at least until the federal election scheduled in October. In the past 24 hours, the USD/CAD currency pair has rallied from a low of 1.3433 to a high of 1.3498.
In an attempt to ratify the USMCA trade agreement, Canada’s Foreign Affairs Minister Chrystia Freeland mooted a Ways and Means Motion in the House of Commons to initiate the approval procedure of the USMCA trade agreement. Freeland announced to the Parliament that she anticipates the new North American trade agreement to be ratified before the expiry of the proposed legislation in June.
“I am confident we will be successful moving forward. Of course, the entry into force of this agreement does not depend solely on Canada.”
Chrystia Freeland expressed her thoughts about the ratification process: “It will be interesting for us to hear from Vice-President [Mike] Pence about the US domestic ratification process.”
For the USMCA agreement to become legal, the legislative body of all the parties involved in the deal must ratify the agreement. In the US, Republicans have stated that they will only vote in favor of the agreement if duties are lifted, while the Democrats have decided to back the deal only if Mexico improves labor laws.
In Mexico, the deal is moving forward to gain approval under the new President Andrés Manuel López Obrador who ensured the passing of the bill that hikes the salaries of Mexican workers.
Notably, the BoC will meet today to debate monetary policy. The market participants anticipate the central bank to leave the present interest rates unchanged at 1.75%. Even though the housing market has functioned well in the past few months, some economists anticipate weakness in 2020.
David Doyle, North American economist and Canadian markets strategist with Macquarie Group, pointed out that a series of five-year fixed mortgage rates are about to reset and the next wave will happen when the domestic economy slows down.
“Where I get more concerned about housing actually is, as we move into 2020, is that the rate reset of five-year fixed-rate mortgage holders moves higher again, 75 to 80 basis points. So that for me is a risk for 2020, that potentially, there’s another bout of weakness coming for housing across the country.
If the same thing happens in 2019 and you have a subdued growth level coming through, the question is, what does that mean for 2020? And I think there are some downside risks associated with that.”
The facts mentioned above indicate that the USD/CAD pair will remain bullish in the short-term.
Technically, the USD/CAD pair has broken the resistance at 1.3470. That level is expected to act as support from here on. The currency pair is also trading above its 50-day moving average. Furthermore, the momentum indicator is also making new highs. As a result, we can expect the USD/CAD currency pair to move up in the short-term.
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