Saudi-Canada Split Sours

The spat between Saudi Arabia and Canada turned into an economic battle with consequences for CAD. The yen was the top performer Wednesday but lost ground in Thursday Asia trade, while kiwi & euro are on the backfoot. A new Premium trade will be posted ahead of the start of the US session.

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Saudi Arabian officials ordered the divestiture of all Canadian financial assets “at any cost” according to an FT report. That helps to explain Tuesday's unusual drop in CAD and Canadian markets. The selling continued after the report and USD/CAD rose to 1.3118.

It's not entirely clear that everything will be sold  and the complete holdings of Saudi sovereign wealth funds and the central bank aren't clear. Considering Canada's usual weightings, we would expect something in the $10 billion to $15 billion range, including $2bn in Canadian equities. In terms of CAD, it's the kind of flow that can easily be absorbed at the right pace but would (or perhaps did) sting if it were rushed.

Saudi Arabia plans to remove 17,000 students from Canada including hundreds of medical residents. The nations also have an arms deal worth $15 billion that was the genesis of recent bilateral issues. It hasn't yet been cancelled but it likely will be. It's grown into an international incident at this point and the US has declined to publicly intervene while Canada has sought the help of Saudi's gulf allies. There are plenty of reasons for both sides to back down but no sign of any softening.

What's the impact for the Canadian dollar? Ultimately, it's a small dollar amount that will be forgotten before long. One key is the US unwillingness to come to Canada's side, reflecting the continued frosty relationship between the neighbouring countries.

Don't forget Friday's Canada jobs report, expected to show employment falling to 18K from 32K and the unemployment rate seen at 5.9% from 6.0%. Friday will also release UK Q2 GDP and US CPI.