The Canadian dollar has been rising on bullishness concerning the North American Free Trade Agreement. If a NAFTA deal gets done, the Canadian dollar will rally, whereas any impasse will hurt the Canadian Dollar.
The Canadian dollar is not the master of its destiny. Instead, it is more of a puppet, with global macro and geopolitical events pulling its strings rather than domestic issues. The evidence is its recent performance. The Canadian dollar rallied when equity and commodity prices jumped after the U.S. hit China with 10% tariffs rather than the original 25% that President Trump was calling for. Traders believed the reduced tariff level was a ploy to jump-start China/U.S. trade negotiations while allowing Trump to look like a "man of his word".
Global oil market developments play a role in the value of the Canadian dollar, even though the domestic market is hampered by distribution constraints resulting in a heavily discounted price for Canadian crude. Trump (him again) disrupted the world oil market when he decided to opt out of the Iran Nuclear treaty and put sanctions on the country including their oil exports. Oil prices have been climbing steadily, but choppily, since the middle of August and West Texas Intermediate (WTI), the North American benchmark price is back above the psychologically-important $70.00/barrel level. The correlation between the Canadian dollar and WTI price moves has deteriorated in the past few months, but the currency still manages a lingering benefit from high prices.
The Canadian dollar is also vulnerable to U.S. dollar demand around the ebb and flow of the United Kingdom and European Union Brexit negotiations. The elevated risk that Britain could leave the E.U. without a friendly negotiated deal often leads to huge price swings in EUR/USD and GBP/USD. The Canadian dollar tracks EURUSD moves closely, and a selloff in the euro would undermine the loonie as well.
The Canadian dollar is vulnerable to emerging market issues as evidenced by the plunge in the Turkish lira last month. The dive was sparked by a combination of factors including concern about the independence of the Turkish Central Bank, rising inflation, a rising need for debt restructuring by Turkish companies and a spat between Turkey President Erdogan and the U.S. The Turkish lira woes spread to the South African rand and Russian ruble among others. The U.S. dollar was in demand, and the Canadian dollar suffered as a consequence.
The U.S.-Canada trade negotiations are another issue driving the Canadian dollar. Traders have been buying the Canadian dollar in anticipation of a successful conclusion to the trade talks. They have ignored warning signals during the past week which included President Trump reiterating his complaint about dairy tariffs. They ignored comments by a senior Republican Senator that his colleagues were getting frustrated with Canada’s negotiating tactics. Yesterday, a White House official repeated that the U.S. was happy to ratify a trade agreement with Mexico, without Canada.
If Canada successfully negotiates a trade deal with the Americans, the prevailing wisdom is that "it would be good for Canada" and that the Canadian dollar will rally. But would it? More than likely a new agreement would mean that Canada has made concessions and is in a weaker trade pact then the previous NAFTA pact which suggests Canadian dollar gains may be limited.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
