The Canadian dollar is ignoring the possible demise of the North America Free Trade Agreement. (Nafta). The 24-year old agreement which first came into effect on January 1, 1994 is on life-support. President Trump said as much yesterday in a press conference to announce the signing of a new trade agreement with Mexico.
Yesterday, President Trump and President Pena Nieto of Mexico held a conference call to announce they had come to terms on a new, bilateral trade agreement. Trump made sure to tell people that Canada wasn’t part of the deal, saying “ As far Canada is concerned, we haven’t started with Canada yet. We wanted to do Mexico and see if that was possible to do.”
He then threatened that if Canada did not negotiate fairly, “with Canada, frankly, the easiest thing we can do is to tariff their cars coming in. It’s a tremendous amount of money, and it’s a very simple negotiation. It could end in one day, and we take in a lot of money the following day.”
The government of Canada is on record stating that they would rather walk away then sign a bad deal. Yesterday’s Trump press conference suggests that the American’s do not feel threatened by Canada and don’t care if Canada walks away.
Naturally, it would be safe to assume that under those circumstances, the Canadian dollar would weaken. That didn’t happen. The Canadian dollar strengthened, gaining 1.0% since yesterday’s press conference. That’s because the news of the US/Mexico accord put global risk in a better light. The improved tone fueled a rally is so-called risk assets. The US dollar retreated across the G-10 spectrum. Commodity prices and Wall Street indices soared Fed Chair Jerome Powell’s speech at Jackson Hole last Friday was another major factor in the US dollar sell-off. Mr Powell’s remarks were considered dovish as he emphasised the need for a cautious approach to US rate increase. A September rate hike looks to be a “done deal”, but the pace of rate increases afterwards may be slower than previously thought.
Another reason for the USD dollar weakness and the Canadian dollar’s strength is that the somewhat hostile US rhetoric about China’s trade policies has been dialled back.
The Canadian dollar may get added support from domestic data releases. On Wednesday, Canada may report a sharply narrower current account deficit (Forecast 1$15.2 billion vs previous -19.5 b). On Thursday, Canada GDP is expected show a 3.3% q/q increase. However, a weak June result may offset the Q2 data.
Today’s US economic reports which include Case Shiller Home Price Index and Wholesale Inventories shouldn’t do anything to impede the existing USD dollar retreat.
