The Canadian dollar sold off further in early trading yesterday with USD/CAD touching $1.3120. At that point, the future was looking pretty grim for the loonie, but it was granted a reprieve in the form of positive developments on the North American Free Trade Agreement front. Rumours surfaced that Mexico and the U.S. were on the verge of an agreement on the important auto file which would be confirmed at the end of the week. Another rumour said that the U.S. and Mexico were keen to get the NAFTA deal signed by August 25 and that Canada would be included in meetings in Washington next week.
The Canadian dollar soared. USD/CAD crashed through support at $1.3060 and triggered stop-loss selling until finding a floor just above the $1.3000 area. Prices see-sawed in a narrow $1.3003-1.3029 range in overnight markets. USD/CAD has seen modest demand since Toronto opened this morning.
The Canadian dollar rally because of the NAFTA rumours may be premature. Canada has not been a part of the latest NAFTA talks and may not be on the same page as Mexico and the U.S. regarding autos. There is a school of thought that suggests the U.S. is more than willing to deal with Mexico on a "stand-alone basis" and then deal with Canada later. Mexico reaffirmed that they believe in NAFTA, but things change. If Mexico and the US agree to terms on autos, Canada may be forced to accept them or be left on the sidelines.
Canada has other serious disagreements with the US trade negotiations. Canada said it would walk away from the talks if the U.S. insists on an expiry date for the deal. This "sunset clause" is a deal-breaker for Canada. Canada is also insisting on a third party dispute resolution process which the U.S. opposes. It is unlikely that these issues will be resolved in the next few weeks, especially when Canada hasn’t been involved in the latest round of talks.
The Canadian dollar is also vulnerable to the Canada/Saudi Arabia diplomatic spat. Saudi Arabia is angered but what it sees as Canada’s interference in a domestic matter. They are reportedly selling all their Canadian assets and the Canadian dollar by default. The asset sale won’t have a lasting impact on Canada or the domestic economy, in the long term. However, in the short term, the assets sales will undermine the domestic currency.
The Canadian dollar is also vulnerable to risk aversion sales stemming from U.S. actions against China and Russia. China matched the tariffs imposed on them by the U.S. with tariffs of their own. They also said they would react to the other $200 billion in tariffs that could go into effect on August 30. The U.S. put new sanctions on Russia and Russia is promising to retaliate. Toronto and surrounding area may be suffering from a heat wave, but there is a chill in the global climate.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
