Canadian dollar higher as US suspends auto tariffs

The Canadian dollar is steady on Thursday after gaining around 1% over the past two days.  In the European session, USD/CAD is trading at 1.4351, up 0.07% on the day.  We could see some volatility from the Canadian dollar over the next two days, with the release of the Ivey PMI today and the employment report on Friday.

The Trump tariff saga took a twist on Wednesday, as the US announced it would exempt automakers in Canada and Mexico from 25% tariffs for 30 days provided they complied with existing free trade rules.  Trump made clear that the trade war between the US and its two neighbors was not over.

Trump has been shooting from the hip, imposing, suspending, and re-imposing tariffs against Canada. Is this merely a heavy-handed negotiation tactic?  If so, chances are good that a deal can be reached and a damaging trade war can  be averted.  Canada can ill afford a trade war with the US, as some 75% of Canadian exports head to its southern neighbor.  A trade war would tip the weak Canadian economy into a recession.

The Bank of Canada is nervously watching as trade tensions escalate between Ottawa and Washington.  The BoC has said that a trade war with the US would inflict "permanent" damage on Canada's economy and boost inflation.  The BoC is in the midst of an easing cycle and a trade war would complicate plans to futher lower rates.

Canada's Ivey PMI fell sharply in January to 47.1 from 54.7, its first contraction in five months. The PMI is expected to rebound in February, with a market estimate of 50.6, which would point to stagnation.  On Friday, Canada and the US release employment reports.

• 1.4375 and 1.4419 are the next resistance lines
• There is support at 1.4300 and 1.4256