Canadian Dollar Traders Turning Defensive As Trade War Tensions Roil Global Forex Markets
Forex traders are facing a trying time as the global forex markets turn tumultuous in the face of an escalating trade war between the U.S. and China. On Friday, the US government ratcheted up tariffs on over $200 billion of Chinese goods from 10% to 25%. In light of this, Canadian dollar traders are turning defensive as the currency is among those adversely affected by the latest twist in the trade war.
The loonie is probably undervalued
On Monday morning, the loonie was trading lower than it closed on Friday. To be sure, the CAD was at $1.3426 at 8:45 CDT after closing at $1.3418 against the greenback on Friday. Notably, the currency closed higher on Friday on the back of data showing that the economy added more jobs than expected. However, the uncertainty in the global markets saw the currency plunge close to 0.2% in the early trading session on Monday. By and large, the loonie traded within the range of 1.3420 to 1.3453.
Nonetheless, knowledgeable observers note that the loonie should be stronger than it is trading currently. In a note to investors, forex strategists from Scotiabank said the current state of the Canadian economy implies a very strong loonie. In particular, the strategists cited the Friday jobs data and the fact that the currency gained close to 0.7% after the data was out.
There is growing optimism in the CAD
According to the strategists, the latest jobs data is impressive and that such a one-month increase was last seen in 1976. Further, oil prices are up following the disruptions in the oil supply from the Middle East. Given that the commodity is a key export for the country, the strategists believe that this should be reason enough for the CAD to be strong. Also, there seems to be increased confidence in the loonie in the market. According to data from Reuters and the US Commodity Futures Trading Commission, last week experienced net short positions at 46,115 compared to 46,745 net short positions during the prior week. As such, this is evidence that there is growing optimism in the loonie.
The future is not rosy for the CAD
However, the CAD might continue the poor run it experienced early Monday since the trade war seems to have entered full gear. On Monday, Chinese authorities answered the U.S. decision to raise tariffs on its goods. In particular, the Chinese government introduced four categories of tariffs which will be imposed on goods from the U.S. worth $60 billion. The categories range from 25% to 5% with a particular focus on liquefied natural gas.
Knowledgeable observers see the move as a direct hit on the President since Louisiana, Texas, and Oklahoma is the three largest exporters of the liquefied natural gas to China, and the states are home to Trump's most ardent supporters. However, Chinese authorities seemed to leave tires and light bulbs untouched with the tariffs remaining at 5% as before. Essentially, CAD traders have more reason to be on the defensive pending the conclusion of the U.S.-China tussle.