The Canadian dollar is sinking. U.S. President Trump’s arbitrary deadline for the North American Free Trade Agreement (NAFTA) came and went on Friday. With it went the hopes of Canadian dollar bulls who were positioned for an agreement. The currency started sliding and then accelerated in thin holiday markets on Monday.
Trump had a lot to do with the added Canadian dollar selling pressure. On Saturday, he tweeted: "If we don’t make a fair deal for the U.S. after decades of abuse, Canada will be out. Congress should not interfere w/ these negotiations, or I will simply terminate NAFTA entirely & we will be far better off..." and then added "....Remember, NAFTA was one of the WORST Trade Deals ever made. The U.S. lost thousands of businesses and millions of jobs. We were far better off before NAFTA - should never have been signed. Even the Vat Tax was not accounted for. We make new deal or go back to pre-NAFTA!"
FX traders reacted by selling Canadian dollars on Monday and again overnight. USD/CAD opened in Toronto at the session high of $1.3150. Prime Minister Trudeau is adamant that Canada won’t sign a "bad deal" as he scrambles to justify protecting the domestic dairy industry. That industry accounts for barely 1% of Canada’s total gross domestic product and is controlled by three multinational corporations.
The problem is that if the Canadian dairy industry is opened up to the Americans, it would crush Canadian dairy farmers, the majority of whom reside in Quebec. Trudeau believes that Canadians would rather lose their jobs or have a lower standard of living in order to keep the Liberals in power. The trade talks will resume on Wednesday.
Canada/U.S. trade issues are just part of the reason for the Canadian dollar weakness today. The U.S. dollar is in demand against the G-10 currency spectrum due to elevated trade risks between the U.S. and China.
The U.S. is unable to slap tariffs on the $200 billion worth of China imports until after the "comment period" expires. That happens on Thursday. President Trump is on record for saying the tariffs will be imposed when the deadline passes. China will react, expected to put duties on $60 billion of U.S. imports, seek markets elsewhere and use their currency to their advantage.
The Bank of Canada monetary policy meeting is on Wednesday. They are widely expected to leave interest rates unchanged. Traders will prefer to shift their focus to U.S. economic data and Friday’s non-farm payrolls report.
Today’s U.S. economics reports include Institute for Supply Management Manufacturing Purchasing Managers Index and Construction spending which should provide additional support to the U.S. dollar.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
