The Canadian dollar will soar if Canada comes to terms with the U.S. trade negotiators. The Canadian negotiating team is in Washington trying to hammer out a deal. The U.S. government insists an agreement must be reached by Friday. That’s because Mexico needs the time between now and December 1 to ratify the U.S./Mexico pact, before the new Mexican president takes office. It is also crucial for the Trump administration, which needs 90 days before Congress can ratify the deal.
Those time constraints have put the Canadian negotiating delegation under extreme pressure. They need to get an agreement completed as President Trump has threatened to impose 25% tariffs on car imports if it doesn’t happen. Car tariffs would decimate the Ontario economy and would severely hamper the Liberals' re-election prospects.
The Globe and Mail published an article during the Asia trading session which implied that Canada would give in to U.S. demands in order to secure a deal. They said the government would make concessions on dairy in hopes of preserving the dispute resolution process and protect Canada’s pharmaceutical industry. The issue is that the U.S. knows they have Canada over a barrel and they may use that advantage to extract more concessions.
The Canadian dollar climbed in Asia, immediately after the Globe and Mail article was published. USD/CAD dropped from $1.2934 to $1.2905 but recovered the losses by the Toronto opening this morning.
The initial reaction to news that Canada and the U.S. have reached an agreement will boost the Canadian dollar to the 80.0-cent level (USD/CAD $1.2500) The move will be fueled by expectations that the Bank of Canada (BoC)would raise interest rates by 0.25% as soon as next week. The BoC’s monetary policy deliberations have been hampered the last few months by the ongoing uncertainty around the North American Free Trade Agreement talks. The U.S. governments imposition of tariffs on steel, aluminum and softwood lumber were another major concern. It is not clear if all these tariffs would disappear under the new agreement which would be a Canadian dollar negative.
Another barrier to Canadian dollar gains is U.S. dollar sentiment. The greenback has been under pressure for the past few weeks with Federal Reserve Chair Jerome Powell’s Jackson Hole speech exacerbating the U.S. dollar selloff. The chairman said that the Fed would continue with a gradualist approach to monetary policy due to uncertainty global. However, the US dollar index suggests that while prices are above 95.30, the U.S. dollar selloff is just a correction.
The Canadian dollar may get a bit of a lift from this morning's Current Account data. Analysts expect that Canada’s current account narrowed to -$15.2 billion in Q2.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
