This morning’s Trade Balance reports from both the US and Canada should be a reason for caution among CAD bulls. The reports highlighted that two-way trade in both countries (imports and exports) slowed for the month of July, suggesting waning activity at home and abroad.
In Canada, the trade deficit came in wider than expected at CAD 2.3 billion for the month, the fourth consecutive reading in which imports have surpassed exports. July’s data was particularly troubling, as both exports and imports fell, similarly driven by a drop in the volume of energy products traded. Overall, exports fell 3.4% for the month, and imports fell 2.2%.
One would expect that an ongoing decline in demand for a country’s exports, especially energy products, would perhaps knock its currency down a few notches. Not so the Canadian dollar: following the release it posted gains to a new 13-month high, hitting a low of 0.9710 so far this morning.
It is becoming increasingly difficult to justify ongoing CAD strength. Jobs growth is up just 1% on an annualized basis, and GDP has stalled at 1.8%, with inflation likewise nowhere to be seen. This suggests that the CAD should be trading closer to par with the USD. But given that markets are driven by expectations of ongoing Fed easing, in contrast to a seemingly untenable tightening bias from the BoC, the market is happy to keep chasing the Loonie higher and higher.
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